11. Calculating and Visualizing Drawdown Demo

PRDTM2-786 AI Trading C3 L2 9 Understanding And Calculating Drawdown Demo V2

Visualizing Investment Drawdown with Python

Understanding drawdown is essential for evaluating potential investment losses over time. This tutorial provides a practical approach to calculate and visualize drawdown using Python tools.

Key Steps:

  1. Import Necessities:

    • Libraries: yfinance, matplotlib.pyplot
    • Dataset: S&P 500 Futures for 2023

  2. Data Preparation:

    • Use Yahoo Finance API to download data
    • Focused on 2023 data
    • Extract the adjusted close prices for calculations

  3. Calculate Metrics:

    • Returns & Cumulative Returns: Compute percentage changes to understand performance over time
    • Cumulative Max: Determine peak values throughout

  4. Explore Drawdown:

    • Identify and visualize areas of potential loss by comparing cumulative max and returns points
    • Calculate drawdown by percentage drop from max

  5. Plot Visualization:

    • Use plotting functions to overlay cumulative returns and drawdown
    • Identify maximum drawdown point visually with markers
    • Customize graph with labels, legend, and title for clarity

Outcome:

  • Developed a visual representation of investment performance, highlighting significant losses over the year.
  • Enhanced understanding of risk in investment decision-making.

Next Concept