What is drawdown in trading?
Drawdown is the decline in account value from an equity peak to the following low point, usually quoted as a percentage. Maximum drawdown is the deepest such decline over a period, and it is the standard measure of how painful a strategy is to hold.
Every strategy that trades has drawdowns; the only question is how deep and how long. Returns tell you what a strategy earned. Drawdown tells you what it cost to stay in the seat while it earned it.
How is drawdown measured?
Track the highest account value reached so far. Whenever equity sits below that peak, the gap between the peak and the current value is the current drawdown. When equity makes a new high, the drawdown resets to zero, and the deepest gap recorded along the way is the maximum drawdown.
Duration matters as much as depth. A drawdown has two dimensions: how far equity fell, and how long it took to recover to a new high. Long, shallow drawdowns break traders as reliably as short, deep ones.
Why drawdown matters more than returns
Losses compound against you asymmetrically. A 20% drawdown needs a 25% gain to recover, a 50% drawdown needs 100%, and a 90% drawdown needs 900%. Deep holes are not just painful; they are mathematically expensive to climb out of.
There is also the human side. Most strategies are abandoned at the bottom of a drawdown, right before they would have recovered. A strategy with modest returns and shallow drawdowns often makes more real-world money than a spectacular one nobody can hold.
How do strategies keep drawdown survivable?
Position sizing does most of the work: risking a small, fixed fraction of equity per trade caps what any losing streak can take. Stop-losses bound individual trades, diversification across uncorrelated markets keeps one asset from sinking the account, and an overall drawdown limit that pauses trading acts as the final circuit breaker.
None of this eliminates drawdown. The goal is to keep the worst stretch inside what the account, and the person behind it, can actually survive.
Drawdown on Horizon
Every Horizon backtest report charts the equity curve with its drawdown periods and states the maximum drawdown alongside returns. Read them together: the return number is the reward, and the drawdown number is the price the strategy charged for it.
Frequently asked questions
- What is an acceptable maximum drawdown?
- There is no universal number, but many systematic traders aim to keep maximum drawdown under 20-30%, and treat anything beyond 50% as unrecoverable in practice. The honest test is personal: the acceptable drawdown is the one you would actually sit through without pulling the plug.
- Is drawdown the same as a loss?
- Not quite. Drawdown measures the fall from a peak, including give-back of earlier profits, so an account can be in drawdown while still above its starting balance. A loss compares to what you put in; drawdown compares to the best you ever had.
- How long do drawdowns last?
- Anywhere from days to years, and backtests routinely understate how long the worst one will feel. Check the longest peak-to-recovery stretch in a backtest, then assume live trading will eventually serve something at least as long.
- Can a strategy avoid drawdown entirely?
- No. Any strategy that takes risk spends time below its last peak. A backtest showing near-zero drawdown is usually a warning sign of overfitting or unrealistic assumptions rather than a discovery.
