Drawdown and risk limits
Peak-to-trough
The decline from an equity curve's highest point to its lowest subsequent point before a new high is made. It is the standard way of stating how deep a strategy's worst historical losing run was.
GFN’s figure
A strategy whose historical peak-to-trough exceeds 8% will eventually breach a GFN 2 Step account, and one exceeding 5% will breach Instant sooner, because that floor also trails.
In detail
Peak-to-trough,explained
Peak-to-trough is what a backtest means when it reports a maximum drawdown figure, and it is measured after the fact across the whole sample. A prop firm's maximum drawdown rule is the same shape of measurement applied live, with a hard stop attached.
Comparing the two is the most useful pre-purchase check available: if a strategy's historical peak-to-trough is deeper than the account's drawdown allowance, it will eventually breach on an ordinary losing run.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
Equity curve
A chart of account equity over time. Its slope shows the rate of return, its smoothness shows consistency, and its deepest dip is the peak-to-trough drawdown a risk limit would have had to absorb.
Maximum drawdown
The total loss an account may take before it is failed. Expressed as a percentage of the starting balance, it sets a floor: touch it and the account breaches, whatever the account has made up to that point.
Drawdown recovery
The gain required to return an account to its previous peak after a loss. Recovery is not symmetrical: a 10% loss needs an 11.1% gain to undo, and a 50% loss needs 100%.
Backtesting
Running a strategy over historical data to estimate how it would have performed. Useful for rejecting ideas, weak as evidence for accepting them, because the result is fitted to data already seen.
High-water mark
The highest level an account has ever reached. On a trailing drawdown it is the reference point the floor is measured down from, so every new high permanently moves the breach level upward.
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