What is Drawdown?

What does Drawdown mean in practice?

Profit says where a strategy ended. Drawdown says what it cost to get there. Maximum drawdown is the single deepest fall from a peak over the whole test, and it is the number that decides whether a strategy is survivable, because a trader who cannot sit through a fall will abandon it at the bottom.

Recovery is not symmetrical. A 50% loss needs a 100% gain to get back to even. That is why drawdown limits are tighter than most people expect, and why a strategy with a modest return and a shallow drawdown can be more usable than one with a large return and a deep one.

A worked example

Illustrative only: equity climbs to 1,00,000, falls to 80,000, then recovers to 1,10,000. The drawdown was 20,000, or 20% of the 1,00,000 peak, even though the account finished higher.

How to read or test it

Look at the maximum drawdown, but also at how long it took to recover and how many separate drawdowns of significant size occurred. Ask whether you would realistically have kept trading through the worst one. Compare the drawdown with the profit: a return that is small relative to the worst fall is a poor trade-off. Be aware that the maximum drawdown in a backtest is a floor, not a ceiling, because a longer history can contain a worse one.

How AKQX handles Drawdown

AKQX backtests report maximum drawdown, and a result is rejected outright if it exceeds 30 percent, regardless of how profitable it looked. Risk carries 50 of the 350 scorecard points.

See Backtesting methodology for the feature page.

A common mistake

Judging a strategy by its final profit and ignoring the path it took to get there.

Related terms