Drawdown – A drawdown is the drop in equity from a peak to a subsequent trough during trading. Maximum drawdown is the largest such peak-to-valley decline observed in the backtest, essentially the worst-case cumulative loss the strategy suffered before recovering. It is usually expressed as a percentage of the peak equity. For example, a 25% maximum drawdown means the strategy’s worst decline in the testing period was 25% of the account value. Smaller drawdowns indicate milder risk, whereas large drawdowns may signal a risky or unstable strategy.

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