Drawdown

How is drawdown measured?

Drawdown is measured from the highest account value reached (the peak) to the lowest value before a new peak is made. It can be calculated on the closed balance or on equity, which also includes open positions; equity drawdown can be deeper because it includes unrealised losses on open positions.

What is maximum drawdown?

The maximum drawdown (max drawdown) is a related but different measure: the largest drawdown over a given period, such as a year or the whole history of an account or strategy. An account can go through many drawdowns; only the deepest of them is its maximum drawdown.

Why does a drawdown need a larger gain to recover?

Because the recovery gain is calculated on a smaller account. After a 50% drawdown, the account has to double, a 100% gain, to get back to its peak. With the drawdown written as a decimal:

required recovery gain = drawdown ÷ (1 − drawdown)

For a 20% drawdown: 0.20 ÷ 0.80 = 0.25, a 25% gain.

Drawdown	Gain needed to recover
10%	11.1%
20%	25%
30%	42.9%
50%	100%

How the risk taken per trade affects the depth of drawdowns: position sizing and the 1% rule.

Example

An account grows from $10,000 to a peak of $12,000, then falls to a low of $9,000 before making a new high. Measured from that peak to that trough, the drawdown is ($12,000 − $9,000) ÷ $12,000 = 25%, and the account needs a gain of about 33.3% from $9,000 to return to $12,000.