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Drawdown is the amount of capital that you could've lost at any given point.

Example: If a position is opened for $2,000, the market moves sharply lower and at the end of the day the $2,000 position is now worth $1,000.  This has given the system a drawdown of 50%. When analyzing the results of a system, pay attention to drawdown.  If drawdown is 90%, but exposure is 1%, that is reasonably tolerable.  If your exposure is 90% and your drawdown is 30-40%, that's a sign that the system has the potential to be down a lot of money at any given point.

See Also

Analyzing System Results