When we talk about the maximum historical drawdown of a system, we want to find the percentage drop from a high in the equity curve to a subsequent low at any point in the backtest. So now, the trading software will look at every high point and every subsequent low throughout the whole backtest. And that low could have come two days later, or it could have come three months later, three years later, or ten years later.
What it does is calculate the percentage drop from whatever that high point was to the low. That’s the maximum historical drawdown. So it’s not several bars look back, it’s to the beginning of the backtest look back. We find all of the high points and subsequent lows, and then measure the percentage drop. We do that for every single bar in the backtest so every time there’s a new high, calculate the subsequent low, and then it goes through all of those and finds the max.