Drawdown measures the drop from a peak to the lowest point that follows, before a new peak is reached. In plain terms: how far did your account fall from its best moment before recovering? It’s the metric of pain.
If an account grows to $10,000, falls to $7,000, and later climbs back, the maximum drawdown was 30%. The final return might still be positive — but anyone living through that 30% fall would have felt every percent of it.
Why returns alone mislead
Two strategies with the same annual return can have wildly different drawdowns. The one with shallow dips is something a real person can hold through. The one that halves before recovering is something most people abandon at the worst possible moment — locking in the loss right before the rebound.
We report maximum drawdown on every strategy, in-sample and out-of-sample. A strategy with a tiny drawdown in testing but a deep one on fresh data is showing its real, hidden risk — the kind that doesn’t appear in a headline return figure.
Drawdown answers a human question, not a mathematical one: could you actually have held this without panic-selling at the bottom?
- 1Drawdown is the fall from a peak to the next trough, measured as a percentage.
- 2Two strategies with identical returns can have very different drawdowns.
- 3Deep drawdowns are dangerous because people abandon strategies at the worst time.
max drawdown — reported in every postmortem table.