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.
How deep can a broad market go? The S&P 500 closed at 1565.15 on 9 October 2007 and at 676.53 on 9 March 2009, a fall of 56.8%, and it did not close above that peak again until 28 March 2013.
Duration is the half nobody quotes
On 93% of trading days from 1950 to 2026 the index closed below a prior record. Being in drawdown is not the exception; it is almost the entire experience of holding anything.
The longest unbroken stretch below a peak was 1,897 trading days, from 11 January 1973 to 17 July 1980 — about 7.5 years 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. A stretch of 60 bars underwater is five hours on a five-minute chart 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, each paying the spread and commission, dig 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. Judgment at the bottom of a long decline is the worst judgment 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 behavior: 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.
How this connects
Several performance ratios are built around it. The Calmar ratio divides return by the maximum drawdown, while the Sharpe ratio and Sortino ratio use volatility, and a method can look very different under each.
Expectancy decides whether a drawdown ends. A positive edge recovers given time and survival, and a negative one simply deepens, which is why a losing streak alone does not say which situation you are in.
Win rate shapes the experience of it. A method that wins rarely produces long runs of small losses, and a method that wins often produces rare deep ones, even with the same average result.
A daily loss limit is the period-based control mentioned above, stated in the trading plan so it is not negotiated during the fall.
Prop firm rules are written almost entirely in these terms, and breaching the stated limit ends the account regardless of whether the method was sound.
Risk of ruin is the drawdown that cannot be recovered, and anti-martingale sizing, which trades smaller after losses and larger after gains, is one direct response to it.
A backtest tuned to minimize historical drawdown invites overfitting.
And revenge trading is how a manageable drawdown becomes a serious one.
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
Of the 24,971 trading and investing videos measured for this site, 7 have “drawdown” in the title, from 7 channels, at a median of 3,813 views.
The question: Down 3% and 40 bars under water. Cut the size?
What did holding through the worst of it demand? Anyone who bought the S&P 500 at its 2007 close of 1565.15 watched 56.8% of the stake disappear by March 2009, then waited until 28 March 2013 just to be level again — five and a half years of drawdown for a price return of zero. 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.
Measure drawdown in time as well as depth. A loss can be sat through; a stretch of months where nothing is wrong and nothing is working is what makes people quit. Ask for that figure on any strategy being sold to you, because it is rarely quoted.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.