Drawdown: calculation, maximum loss and recovery
Drawdown measures a decline from a previous peak. It helps you understand the path of a strategy, not just its final result. A positive total return can conceal a substantial losing period.
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The calculation, with a simple example
With no deposit or withdrawal, an account that reaches 10,000 then falls to 8,000 has a 20% drawdown. The calculation is: (peak − current value) ÷ peak × 100. Historical maximum drawdown is the largest such decline observed over the period and series examined.
Returning to the peak requires a different gain
After a loss, the required gain is calculated on a smaller capital base. After −20%, a +25% gain is needed to return to the starting point, with no additional flows or fees. This table is a mathematical example, not a forecast for a FINBASE strategy.
| Loss | Gain needed to recover |
|---|---|
| −10 % | +11.11 % |
| −20 % | +25 % |
| −30 % | +42.86 % |
| −50 % | +100 % |
Balance or equity: the distinction matters
Balance reflects booked transactions. Equity also includes unrealised gains and losses on open positions. A closed-trade curve can therefore show a smaller decline than the one experienced during a trade. Compare drawdown figures using the same definition, period and a comparable sampling frequency.
Historical drawdown is not the hard stop
The first describes a past observation; the second is a protection threshold specified by the strategy. An exit threshold does not guarantee an execution price: gaps, liquidity and slippage can affect the realised loss. Examine the threshold and protection rules on each page rather than treating a historical figure as a guaranteed future limit.
Read a strategy beyond its return
Examine how long the strategy stayed below its peak, whether losses concentrate in one asset and whether recent results cover a complete period. Deposits and withdrawals must be distinguished from performance. A short track record may only have encountered one market environment: observation length matters.