Drawdown: Depth Is Half the Story
A drawdown is the fall from the highest value an account has reached, measured as a percentage of that peak. Depth is the figure everybody quotes and duration is the one that decides whether a method gets abandoned, because most of the time is spent below a prior high.
How it works
A drawdown measures from a peak. Not from your deposit, not from the start of the year — from the highest value the account has ever reached.
That distinction matters more than it sounds. An account up 40% that falls to up 20% is in a 14% drawdown while still being well ahead, and it feels exactly like losing money because in every sense that matters, it is.
On this site’s shared 576-bar history, holding the series itself, the deepest drawdown was 3.76% against a net gain of 3.61% across the whole period.
Duration is the half nobody quotes
95% of bars were below a prior peak. Being in drawdown is not the exception; it is almost the entire experience of holding anything.
The longest unbroken stretch below a peak was 73 bars. On a daily chart that is most of a quarter of never once making a new high.
Every published performance figure quotes maximum drawdown and almost none quote time underwater. The depth is what a risk model needs and the duration is what a person actually experiences — and it is the duration, not the depth, that ends most methods, because a shallow decline that lasts long enough gets abandoned as easily as a deep one.
The recovery arithmetic is asymmetric. A 10% fall needs 11.1% to recover, a 33% fall needs 50%, and a 50% fall needs 100%. The relationship steepens sharply, which is the entire mathematical case for limiting size.
In practice
Costs deepen every drawdown and lengthen every recovery. They come out during the fall and during the climb back, which is why an active method’s drawdowns are worse than its trade record suggests.
Thin volume lengthens recoveries. Smaller ranges mean less available profit per trade against an unchanged cost, so climbing back takes more trades and more time.
Bar counts scale with the timeframe. The same 73 bars is a few days of scalping or a full quarter of daily bars, and only one of those is psychologically survivable without a plan.
A gap can deliver an entire drawdown in a single print, which is the case no intra-session risk control addresses.
A stop limits a single loss and does nothing about ten in a row. Drawdown is a property of the sequence, so the controls that work on it are position size and a limit on how much can be lost in a period.
Trading harder to escape one makes it worse. More trades at 2% of a median bar’s range each is a deeper hole, and the urge to accelerate is strongest exactly when the arithmetic is least forgiving.
Planning for it before it arrives
Write down the drawdown you will accept before you need the number. Depth as a percentage, duration in weeks, and what you will do when either is reached — reduce size, stop and review, or continue unchanged because both are within what the method’s history implies.
The decision has to be made in advance because it cannot be made well during. Judgement at the bottom of a long decline is the worst judgement available, and a rule written when nothing was wrong is the only version of yourself worth listening to then. A method with no stated expected drawdown is a method that has not been thought through, whoever is selling it.
One practical measurement is worth adding to any review: the drawdown you are in right now. It takes one line — the highest account value reached, minus the current value, as a percentage of the peak — and it converts a vague sense of how things are going into a number that can be compared with the plan.
Track the running peak rather than recomputing history. A single stored figure updated whenever the account makes a new high is all that is required, and having it visible changes behaviour: a trader who can see 2.1% underwater against a stated 8% tolerance is in a very different position from one who only knows that recent weeks have felt bad.
What a drawdown is not
It is not measured from your deposit. It is measured from the peak.
It is not a loss on a trade. It is a property of a sequence of them.
It is not fixed by a stop. Stops cap trades, not runs of them.
And it is not only about depth. Time underwater is the other half.
When it fails as a measure
In a range the drawdown deepens with no losing trade large enough to notice. Costs and small losses accumulate, nothing looks wrong in the trade log, and the equity curve is grinding lower.
The second failure is comparing maximums across methods. A 20% drawdown over three weeks and one over three years are not the same risk with the same number attached.
A third is quoting the historical maximum as a limit. It is the worst that has happened so far and not a bound.
A fourth is measuring it on closed trades only. Open positions produce the drawdown you actually live through.
And a fifth is ignoring duration entirely, which is what almost every published figure does.
The original data
On this site’s shared 576-bar history, holding the series itself, the maximum drawdown was 3.76%, the
median reading 1.36% and the ninetieth percentile 2.72%. 95% of bars sat below a prior peak, the longest
unbroken stretch below one ran 73 bars, and the series finished 3.61% above where it started. The figures
are in research/series-measurements.json, produced by site/measure_series.py.
A maximum drawdown almost identical to the total gain is the finding worth sitting with. The series made 3.61% and gave back 3.76% at its worst point along the way — which means a holder needed to tolerate a decline larger than everything the position eventually earned. Judge a method by the size of its drawdown relative to its return, not by either number alone, and most performance claims become much easier to read.
Related
Risk management is the framework drawdown control belongs to. Ulcer index combines depth and duration in one figure. And risk per trade is the lever that actually changes it.
The number that changed how I think about this was time, not depth. I can sit through a loss. What nearly made me quit was a stretch of months where nothing was wrong and nothing was working, and I had never once seen anybody quote that figure for a strategy they were selling.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.