Drawdown Metrics
Drawdowns measure how much your equity declines from its peak before recovering. They're the most important risk metrics — a large drawdown can wipe out months of gains and test your psychology. Drawdown tolerance is also one of the most common causes of psychological failure in live trading.
Quick Reference
| Metric | Formula | Unit |
|---|---|---|
| Max Drawdown ($) | Largest peak-to-trough equity decline | $ |
| Max Drawdown (%) | Max DD / Peak Equity at Max DD × 100 | % |
| Max DD Date | Date when the deepest drawdown occurred | date |
| Max DD Duration | Longest drawdown period in days | days |
| Avg Drawdown ($) | Average of all drawdown trough values | $ |
| Avg Drawdown (%) | Avg DD / Initial Capital × 100 | % |
| Avg DD Duration | Average drawdown recovery time | days |
| DD StdDev | Standard deviation of drawdown depths | $ |
| DD Coefficient of Variation | DD StdDev / Avg DD | ratio |
Key Metrics Explained
Max Drawdown (%)
The single most important risk metric. It shows the worst peak-to-trough decline as a percentage. If your account peaked at $100,000 and then dropped to $70,000 before recovering, the max drawdown is 30%.
| Max DD % | Tier | Interpretation |
|---|---|---|
| ≤ 15% | Excellent | Very controlled risk |
| ≤ 25% | Good | Acceptable for most traders |
| ≤ 40% | Caution | Significant capital risk |
| > 40% | Failed | Dangerous — recovery is very difficult |
Warning
A 50% drawdown requires a 100% gain just to get back to breakeven. As drawdowns increase, the required recovery grows exponentially.
Max DD Duration
How long the worst drawdown lasted. A shallow but long drawdown can be just as psychologically damaging as a deep but short one.
Average Drawdown
The average depth of all drawdown events — not just the worst one. This shows the typical pain level during losing periods.
DD Coefficient of Variation
How variable drawdowns are. A high CV means drawdown severity is unpredictable — sometimes shallow, sometimes deep. A low CV means drawdowns are consistently sized (easier to plan for).
Recovery Context
Related metrics in Risk Ratios:
- Recovery Factor = Net Profit / Max Drawdown — how much you earn per dollar of max drawdown
- Avg Recovery Days — average time to recover from drawdowns
- Time Underwater % — what percentage of time is spent below the equity peak
Tip
Use Monte Carlo simulation to estimate the probability of worse drawdowns than your backtest history shows.
Tip
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