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Maximum Drawdown: Why Losses Are Harder to Recover Than You Think

What maximum drawdown is, how to calculate it, the gain needed to recover from each drawdown, and how to keep drawdowns small enough to survive.

By the TradeThink team3 min read

Maximum Drawdown: Why Losses Are Harder to Recover Than You Think

Drawdown measures how far your account has fallen from its highest point. Maximum drawdown is the largest such drop over a period. It is one of the most important numbers in trading, because it tells you the worst pain your strategy has delivered and how deep a hole you might have to climb out of.

How to calculate it

  1. Track your account equity over time.
  2. At each point, note the highest value reached so far: the peak.
  3. Drawdown at that point = (current value − peak) ÷ peak.
  4. Maximum drawdown is the largest of these drops.

Example: your account grows from $40,000 to $50,000, falls to $42,000, then recovers to $55,000. The maximum drawdown is ($42,000 − $50,000) ÷ $50,000 = −16%.

Equity on top, drawdown below. The deepest point of the lower chart is the maximum drawdown.
Equity on top, drawdown below. The deepest point of the lower chart is the maximum drawdown.

The recovery problem

Losses and gains are not symmetrical. After a loss, you need a larger percentage gain to get back:

Drawdown Gain needed to recover
−10% +11.1%
−20% +25.0%
−30% +42.9%
−40% +66.7%
−50% +100%
−75% +300%

This is the strongest argument for small risk per trade. A 10% drawdown is a bad month. A 50% drawdown can take years to recover from.

Duration matters too

How long a drawdown lasts matters as well as how deep it is. A 15% drawdown that recovers in three weeks feels very different from one that lasts a year. Track the time from peak to new peak. The Ulcer index combines depth and duration in one number.

Keeping drawdowns under control

  • Small, fixed risk per trade. See position sizing.
  • A daily loss limit, so single days cannot do major damage.
  • Reduce size during drawdowns. Cutting risk in half at −10% slows the decline.
  • Watch correlation. Several correlated positions can produce one large loss. See correlation risk.

Drawdown vs return

A strategy's return means little without its drawdown. The Calmar ratio compares annual return with maximum drawdown, and is a quick way to compare strategies with different risk levels.

In TradeThink

Your equity curve, current drawdown and maximum drawdown are shown on the dashboard and statistics pages, along with the Calmar ratio and metric history, so you can see how deep and how long your drawdowns have been.

More on risk management