EDIT: My example was not clear about the peak balance. Corrected.

Clearly you guys are in a different time zone to me! I would like to make some notes, but if I am missing the point, please ignore.

Firstly, Acidburn's cited drawdown definition is correct and that's how one would calculate when live trading. It is dependent on the definition of peak...Peak at the start of live trading is the initial balance of your account. Peak at the start of a back test is usually $0.

A similar example. Suppose your system makes $100 / month in the winning months and loses $100 / month in the bad months. Suppose April is going to be a bad month. If you start trading in January with an initial balance of $100, you will have a run up of $300 to peak $400 balance, then a loss in April of $100. So at the end of April your drawdown will be 25%. If you started trading in February with $100, you would have a run up of $100 to $200 balance and then a loss in April of $100. Thus you drawdown at the end of May is 50%. Same $100 drawdown, two different percentages. In a backtest, the initial balance is $0, so in the two examples above, the drawdown would be 33% and 100% respectively. Four different percentage drawdowns.

I believe this is why jcl finds the question to be confusing. Peak prior to drawdown to calculate drawdown percent depends on the initial balance and how much run up you have before the drawdown.

My solution....Personally, I like expressing all trades in terms of R-multiples (another Van Tharp concept.) Your initial stop is how much you will risk (R). Then the losing trades are -1R unless you move your stop further or closer. The winning trades are some positive decimal of R, e.g. +2R. Essentially you are normalising every trade to the risk. This is useful because you can determine the max drawdown in terms of R multiples and apply that to your risk per trade. E.g. suppose your backtest said that the greatest draw down that theoretically occurred was 20R. If you are risking 1% of your account on each trade, then the greatest theoretical drawdown is 20R x 1% = 20%. Therefore at 1% risk, you stand to lose 20% of your account if you go through the greatest historical drawdown in the future.

Problems with this approach - Firstly, your account goes into draw down, your 1% risk should gradually represent smaller amounts. I.e. First loser 1%, second loser 1% of new balance which is 0.99% of original balance, etc. This actually works for you in that at then end of 20 x 1R losers, you are not down 20% from the peak. You would be down about 17.9%. But it is good for getting a feel for risk and where you are on the equity curve.

Second problem, people come up with complex position sizing strategies. jcl even states that the fixed percent model is statistically doomed. So exactly how to apply R-multiples to the model jcl suggests with OptimalF is beyond me. In fact, when Acidburn was trying to understand OptimalF last year, I was totally clueless (one day I will apply myself to that one.)

Finally, this approach is not adopted in any software I know of. I find it odd as it is the way that I view the world of trading. It is the colour of my glasses, so to speak. Yet so many traders (and software) do not record the stop in the trade log. So you don't have a record of what you were risking. Seems strange to me given that this is a risk management game.

Ok, that's my bit. Hope I have helped a little, at least with my explanation of drawdown percent.