Drawdown
Family III · Risk
Not to be confused with forex drawdown, maximum drawdown.
Drawdown measures how far an account or strategy has fallen from its highest point. It is typically quoted as a percentage of the previous equity peak, so a fall from 10,000 to 8,000 is a 20% drawdown. The figure resets only when a new peak is reached, and it is monitored continuously rather than at fixed intervals.
Calculation
Drawdown is calculated as the difference between the current value and the highest value reached so far, divided by that highest value. The peak is the running maximum, not the starting balance, so a series of gains followed by a loss produces a drawdown measured from the highest equity point.
For a single position, the same logic applies to the position's mark-to-market value. For a portfolio, it applies to total equity after all open positions are marked to market.
Worked example
Use and reporting
Drawdown is reported alongside return figures because two strategies with identical returns can carry very different interim losses. It is used in risk limits, in performance reporting, and in the design of position sizing rules. The depth and duration of a drawdown are both relevant: a shallow but long drawdown affects compounding differently from a deep but short one.
Brokers and platforms may display drawdown differently, and the exact method of calculation can vary by provider. Some report it on closed trades only, others on floating equity. The lookback period also varies, so a figure labelled simply as drawdown should be read with its stated basis.
Often confused with
- forex drawdown
- Forex drawdown is the same peak-to-trough measure applied specifically to a foreign-exchange account or strategy, so the difference is the market context rather than the arithmetic; the visible sign is that the figures are quoted in a currency pair's terms or on a forex account statement.
- maximum drawdown
- Maximum drawdown is the largest single peak-to-trough decline observed over a defined period, while drawdown is any such decline at a given moment; the visible sign is that maximum drawdown is a single historical figure for the whole period, not a live value.