Concept
Drawdown
Drawdown is the decline from a peak in account value to a subsequent trough, expressed as a percentage. Maximum drawdown is the largest such decline over a period.
How to read it
- It is measured peak to trough, so it captures the worst stretch rather than the start-to-end change.
- Recovery is asymmetric: a 20% drawdown requires a 25% gain to recover, a 50% drawdown requires 100%, and a 70% drawdown requires 233%.
- Duration matters as much as depth. A shallow drawdown lasting a year is a different experience from a sharp one lasting a fortnight.
What it does not tell you
- Maximum drawdown is the worst that has happened, not the worst that can. A record showing 18% has not established 18% as a ceiling.
- It is measured after the fact and cannot be forecast.
- Drawdown depth scales directly with position size, so it says as much about sizing decisions as about the method being used.
Frequently asked questions
What is a good maximum drawdown?
That depends entirely on what an individual can tolerate and continue trading through, which is personal rather than a number this page can supply. What is objective is the recovery arithmetic: deeper drawdowns require disproportionately larger gains to undo.
Why is recovering from a drawdown harder than the drawdown itself?
Because the gain is calculated on the reduced balance. Losing 50% leaves half the capital, so returning to the original figure requires doubling what remains.
Does a small historical drawdown mean a strategy is safe?
No. Maximum drawdown records the worst outcome observed in the sample. Conditions outside that sample can produce worse.
How is drawdown different from a loss?
A loss is on a single trade. Drawdown measures the decline in total account value from a peak, so it accumulates across trades.
Related
- Position Sizing Basics — Strategy
- Expectancy and Win Rate — Concept
- Risk-Reward Ratio — Strategy
Educational use only
This page is educational material about how a technical tool is calculated and read. It is not investment advice, not a recommendation to buy or sell anything, and not a signal service. No indicator predicts future prices. CernoQuant is a trading journal and analytics platform, not a SEBI-registered investment adviser. Trading decisions and their outcomes are yours alone.
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