Drawdown

1. What is Drawdown

Drawdown is the decline of an account from its peak to a trough before a new peak, usually in percent. If an account goes from $100k down to $80k before recovering, that period's drawdown is 20%.

Maximum Drawdown (Max DD) is the largest drawdown that has occurred over a period — the "worst pain" the account/strategy has taken.

2. Why it matters

• Drawdown is the risk measure you actually feel: not "average gain", but "how much was lost, and for how long".
• The killer point: a loss needs a bigger gain to recover. Lose 20% and you need +25% to get back; lose 50% and you need +100%; lose 90% and you need +900%. Keeping drawdown small matters far more than chasing big gains.

3. Ways to view it

• Current drawdown: how far below the recent peak you are.
• Maximum Drawdown: the deepest historical dip.
• Recovery time: how long to reach the old peak — often more painful than the depth, because it's a long psychological grind.

4. How to apply

• Loss ↔ gain-to-recover table (memorize it):
• −10% → need +11%
• −20% → need +25%
• −30% → need +43%
• −50% → need +100%
• Set a personal drawdown limit: when the account dips to a threshold (e.g. −15%), cut size or pause to reassess — instead of forcing a recovery.
• When evaluating a strategy (backtest), read Max DD alongside profit: a strategy that makes 30%/yr with a 60% Max DD may be unlivable in practice.

5. Worked example

Two strategies both make 40% a year:

• A: Max DD 15% → smooth, easy to follow.
• B: Max DD 55% → periods of losing over half the account. Profitable on paper, but most people quit midway.

→ Same profit, drawdown decides which is followable in real life.

6. Common mistakes

• Choosing by profit alone, ignoring drawdown.
• Sizing up to recover fast while in a drawdown — usually digs the hole deeper.
• No stopping limit — letting drawdown drift to unrecoverable levels.
• Underestimating recovery time — preparing for the depth but not the long grind.

7. FAQ

• What drawdown is acceptable? Depends on risk appetite, but smaller is easier to live with. Many set a personal cap around 20-30%.
• Why does −50% need +100% to recover? Because gains are computed on the remaining (smaller) capital. 50 must double to reach 100.
• How is drawdown different from risk of ruin? Drawdown is a decline (often recoverable); risk of ruin is the probability of falling to an unrecoverable level.

8. Tools

• _(Coming)_ "Loss → gain needed to recover" calculator.

9. Checklist

• ☐ Do I know my strategy's historical Max Drawdown?
• ☐ Do I have a personal drawdown limit to de-risk/pause?
• ☐ While in a drawdown, am I increasing risk to recover? (If so → stop.)