In sports betting, drawdown is the maximum decrease of the bankroll during the implementation of a betting system.
The term is mostly known in financial markets and investment circles, as it is very important for measuring the viability of an investment. Similarly, it is one of the elements of proper money management in sports betting.
For example, estimating correctly the drawdown during the implementation of a system allows not having to change the bet size. Therefore, betting can be carried on according to the original staking plan without the bettor having to abruptly abort the betting system.
Up to a certain extent, estimating drawdown would define the initial capital which could be invested in sports betting.
Drawdown is the maximum downward fluctuation of the betting capital
Let us consider the following simple example.
After a winning system has been confirmed, we study its past performance. Starting in 2005 with €10,000 capital, a player who applied the particular betting system, would have won €3,000 at the end of the year. In 2006 with an initial capital of €13,000, at the end of the year the total amount would have been €17,000, while in 2007, it would have become €22,000, and so on.
However, if we examined the results in more detail during the year of 2005, we would realize that while our capital has reached €12,000 at one point before the year end, it also fell in a month to €10,500.
That difference was €1,500. Nevertheless, following that loss it has recovered quickly ending the year in profit.
In 2006, our capital reached €18,000, before retreating back to €15,000, following a further increase to €17,000, a profitable level sustained till the end of the year.
That difference was €3,000.
Later in 2009, while our total capital has reached €34,000, it falls to €31,500 before resuming the uptrend.
Total difference within the year: €2,500.
Consequently, the maximum drawdown of our system was €3,000, recorded in 2006.
Using drawdown for defining a staking plan and bankroll accordingly
As a result, if we consider flat betting of €200 per selection as our staking plan, the maximum pressure our system has suffered is accounted to 15 bets. Therefore, if at some point in the future, we record a loss of 10 bets in a single year, we should not worry because the drawdown is within the expected limits we have so far encountered.
However, we should estimate and predict correctly the drawdown in our money management decisions. The betting amount for these losing bets must always be available. Obviously, our total capital must be much more than the maximum drawdown, so that we don’t go bankrupt!
In addition, after taking the drawdown into account, there should be enough money to continue betting at the same pace according to our betting system, without any decrease in the bet size. Moreover, enough capital must be available for the next drawdown curve.
For this purpose, a simple and fairly widespread rule of thumb is our capital to be equal to at least 50 bets. In other words, we should be able to afford a risk of 2 percent of our capital in each bet. If you want to be on the safe side, 1 percent limit is considered quite safe when a system has been proven profitable.
On the graph above, the two points of a drawdown part of a winning curve have been marked, in order to become clearer which period drawdown refers to.