Drawdown
Definition
Drawdown measures the decline from a peak bankroll to a subsequent trough before a new peak is reached. Maximum drawdown is the largest such decline and is a key risk metric. Understanding expected drawdowns prevents emotional decision-making during losing streaks.
Formula
Drawdown % = (Peak Bankroll - Trough Bankroll) / Peak Bankroll x 100%Example
Your bankroll peaked at $5,000 and dropped to $4,200 before recovering. The drawdown was ($5,000 - $4,200) / $5,000 = 16%. Monte Carlo simulation might show that a 16% drawdown is well within normal expectations for your strategy.
Related Terms
Monte Carlo Simulation
StatisticsMonte Carlo simulation is a computational technique that uses random sampling to model the probability of different outcomes. In betting, it simulates thousands of possible bankroll trajectories based on your historical edge and variance to estimate risk of ruin, expected growth, and confidence intervals.
Variance
StatisticsVariance measures how widely your betting results spread around the expected value. High variance means large swings (common with longshot bets at high odds), while low variance means more predictable results. Understanding variance helps set realistic expectations and avoid tilt.
Standard Deviation
StatisticsStandard deviation is the square root of variance and quantifies the typical size of swings in your betting results. It is expressed in the same units as your returns (dollars or units), making it more intuitive than variance for assessing risk.
Sample Size
StatisticsSample size refers to the number of bets in your track record. In sports betting, small samples are dominated by variance and tell you very little about true skill. Statisticians generally recommend at least 500-1,000 bets at similar odds ranges before drawing conclusions about edge.
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