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Drawdown: Long and Short

by bug man, 3772 days ago
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The drawdown measures the decline of a time-series from an historical peak; generally the drawdown is used to analyze portfolio equities.
The maximum drawdown will then let you know how much money a portfolio has lost (or the maximum portfolio value decline) during the investing/backtesting period and therefore the drawdown is a measure of the risk of a financial investment.
This drawdown measure is very important and is the basis of many other financial risk measures.

The drawdown can also be used for normal time-series or security quotes.
This function is an extension of the already available drawdown function. The function that exists in QuantShare let you calculate the drawdown of a time-series. But what the QuantShare drawdown formula doesn't calculate is the drawdown of a security if we are short the asset.

This function has two calculation modes: a long mode and a short mode.
In a short mode, the formula calculates the drawdown of the time-series as if we were short this time-series security; the more the time-series raise the more the drawdown increase (since the calculated values are negative the drawdown values will, in fact, decrease); and the opposite for the long mode.
Note that the drawdown calculation starts from the first quote.

The function name is 'drawdown_adv', it accept only one parameter; this parameters will let you decide whether to calculate in long or short mode.
Set the parameter value to 1 for a long mode, otherwise the short mode will be used.

The formula isn't complicated; it is about 30 lines of code. It starts by getting the close price of the asset, then loop through the time-series data elements while keeping track of the highest close values (long mode) or lowest close values (short mode).


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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.