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The maximum drawdown of a stock is calculated using the "Drawdown" function. This function returns the maximum drawdown of a price series since the first bar.
The maximum drawdown composite indicator averages the max drawdown of all stocks in the universe by calculating the max drawdown of each stock and then dividing that value, for each bar, by the total number of stocks. Finally, each element of the time-series is multiplied by -100.
The composite contains a filter to reject stocks with low trading volume; stocks with an average daily volume of less than $100,000 are not included in the composite calculation.
If you want to calculate the drawdown based on a fixed number of past bars then you should download a custom trading indicator such as Maximum Drawdown Indicator and change the composite formula by replacing "Drawdown" function with "MaxDrawdown".
Interpretation:
- The indicator moving downwards indicates that the maximum drawdown of many stocks is decreasing. This is clearly a bullish signal for the market.
- The indicator moving upwards indicates that the maximum drawdown of many stocks is increasing. This is a bearish signal for the market.
- The indicator is approaching the zero line indicates that more stocks are making new all-time highs.
