Drawdown

### What it measures Drawdown is the peak-to-trough decline in account equity before a new high is set, expressed as (trough minus peak) divided by peak, times 100. Robeco defines maximum drawdown as "the peak-to-trough decline of an investment during a specific period," usually quoted as a percentage of the peak. It is honest in a way volatility is not. Standard deviation averages your wobbles. Drawdown reports the single worst run you actually lived through, and how long you stayed underwater in it. It is also path-dependent and period-dependent: change the window and you change the number. That is why professionals read it against return rather than on its own. The Calmar ratio, for instance, is compounded annual return divided by maximum drawdown. ### The maths that makes it brutal A loss and the gain needed to undo it are not the same size, because the recovery is measured off the smaller balance. BacktestBase publishes the ladder: a 10% drawdown needs an 11.1% gain to get back to flat, 20% needs 25%, 30% needs 42.9%, and 50% needs a full **100%** gain. Every extra percent down costs more than the one before it. Which makes position size, not strategy selection, the real control. Eight losses in a row at 1% risk per trade compounds to roughly a 7.7% decline. The exact same eight losses at 2% risk is about 14.9%. Identical strategy, identical trades, and one version is survivable while the other one has already ended. ### The funded-account version Prop firms convert drawdown from a feeling into a hard rule. Per FTMO's published trading objectives, the 2-Step Challenge sets a **Maximum Loss of 10%** of initial simulated capital, a static floor at $90,000 on a $100,000 account, plus a **Maximum Daily Loss of 5%** ($5,000) which resets at 00:00 CE(S)T. Their 1-Step program is tighter still: 3% daily, and the 10% Maximum Loss *trails*, moving up with your highest end-of-day balance. Two things fail traders here, and neither of them is bad analysis. - The limits are calculated on **equity**, not closed balance. FTMO states it includes the profit and loss of open positions, plus swaps and commissions. You do not need to close a losing trade to breach the rule. You only need to be holding it. - The daily limit is the sharper blade. You can be nowhere near the 10% total and still fail on one bad session. Now re-read the sizing arithmetic above. Eight consecutive 2% losses is roughly a 15% decline, straight through a 10% hard limit, without a single unusual trade. ### Size to your real threshold Max drawdown is the pain you have to be able to sit through, and the drawdown you *say* you can tolerate is rarely the one where you actually close the platform and stop following the plan. Find that number on small size, before the market finds it for you. Then size the strategy so its expected worst run sits comfortably below your real quitting point, not level with it. If a strategy's historical max drawdown already crowds your limit, the strategy is not too risky. Your position size is.