Understanding Drawdown in Propfirms: Absolute vs. Relative Drawdown

A propfirm is a type of financial institution that specializes in trading for its own account. Propfirms typically use a variety of strategies and instruments to take advantage of market opportunities and generate profits. Propfirms often employ traders who are experienced in various forms of trading, such as day trading, swing trading, and algorithmic trading.

A drawdown in trading is a measure of an investment's peak-to-trough decline. It is usually expressed as a percentage of the peak value. A drawdown is used to measure the risk of an investment, as it shows the maximum amount of capital that has been lost in a given period of time.

The difference between absolute drawdown and relative drawdown is that absolute drawdown measures the peak-to-trough decline in terms of the actual dollar amount lost, while relative drawdown measures the peak-to-trough decline in terms of the percentage of the peak value. For example, if an investment has a peak value of $100 and a trough value of $50, the absolute drawdown would be $50 and the relative drawdown would be 50%.