Max Gain & Draw Down

Received a comment on Max Gain % and Draw Down %. The question is how these 2 values are computed and how to use them.

Lets take Boeing as an example.

If we were to buy Boeing (http://finance.yahoo.com/q/hp?s=BA) at the open on 31 Jan 2008. The entry price is 81.78. On every trading day, you take the day high to calculate the gain your open trade experienced. Similarly, you use the day low to calculate the loss that your open trade experienced.

You do this everyday until you closed the trade.

The Draw Down % will then be the maximum loss experienced while holding on to the trade.

The Max Gain % will be the maximum gain experienced while holding on to the trade.

So if you opened a trade for Boeing on 31 Jan 08 and hold it till 4 Feb 08, the Draw Down % is 1.198% and Max Gain % is 2.702%

Some traders use the Max Gain % and Draw Down % to set your stop loss or profit target.

How to use this depends largely on a trader's trading style and methods adopted.