8.4Drawdown
- ·How drawdown is measured
- ·The asymmetry of recovery
- ·Why drawdown control is a strategy constraint
Drawdown is the decline from an account's equity high to a subsequent lower point.
Drawdown = $200, or 20%.
Large drawdowns require disproportionately larger gains to recover. A 50% loss requires a 100% gain to return to the starting point.
Recovery mathematics punishes large drawdowns disproportionately.
From $1,000 down to $500, the account needs +100% to recover — the same percentage loss and gain are not symmetric.
Examples use historical or illustrative data only. They are not live market signals.
Calculate the gain required to recover from 10%, 25% and 50% drawdowns.
Recovering a 50% drawdown requires a gain of:
An account falls from $1,000 to $800. The drawdown is:
- 01Drawdown measures decline from an equity high.
- 02Recovery requirements grow non-linearly.
- 03Controlling drawdown protects future compounding.
Educational content only. Nothing here is financial advice or a recommendation to trade. Trading involves risk of loss, results vary between individuals, and past performance does not indicate future results. Only capital you can afford to lose should be exposed to market risk.