What is drawdown?
If account equity reaches 10,000 and later falls to 8,000 before making a new high, the peak-to-trough drawdown is 2,000, or 20% of the prior peak.
Why recovery requires a larger percentage gain
Percentage losses and gains are asymmetric because the recovery starts from a smaller capital base.
20% drawdown
A fall from 10,000 to 8,000 is -20%. Returning from 8,000 to 10,000 requires a +25% gain.
Maximum drawdown
Maximum drawdown is the largest observed peak-to-trough decline over the measured period. It helps describe historical downside but does not cap future drawdown.
Drawdown and strategy evaluation
Two strategies with similar returns can have very different drawdown profiles. Drawdown duration and recovery time can matter alongside depth.
Common mistakes
Looking only at return
Return without downside context gives an incomplete picture of a strategy.
Assuming historical maximum is a future limit
Future market conditions can produce larger losses than the backtest.
Increasing risk to recover faster
Larger exposure after losses can deepen drawdown rather than repair it.
Key takeaways
- Drawdown measures decline from a prior equity peak.
- Recovering from a percentage loss requires a larger percentage gain from the lower base.
- Maximum historical drawdown is descriptive, not a guaranteed future limit.
- Drawdown depth and duration both matter when evaluating a strategy.
Sources & further reading
This lesson is educational material. Market structure, exchange rules, fees, margin requirements and derivatives mechanics can differ by venue and can change over time. Verify current rules with the venue you use.