Drawdown vs Max Drawdown: The Two Numbers Every Trader Should Track
Macro Glossary, Orders and Risk
By Ken Chigbo, macro trader and founder of KenMacro, 18+ years in markets.
Updated 2026-05-20
The desk’s answer
Drawdown is the percentage decline in account equity from a recent high-water mark to the current value. Maximum drawdown is the largest such decline observed over the strategy’s history, the worst peak-to-trough fall on record. The two numbers are different: current drawdown can be small while max drawdown was once large. Both matter because the recovery percentage required to break even rises faster than the drawdown does: a 20 percent drawdown requires a 25 percent gain to recover, a 50 percent drawdown requires a 100 percent gain. Above 30 to 40 percent max drawdown most strategies are functionally dead.
Defined term, Drawdown vs maximum drawdown
Drawdown is the percentage decline in account equity from a recent peak (high-water mark) to the current value. Maximum drawdown is the largest drawdown observed over the strategy’s history, the worst peak-to-trough decline ever recorded. The recovery percentage rises faster than the drawdown does because the recovery is calculated against the smaller post-drawdown balance, so a 20 percent drawdown requires a 25 percent recovery to break even.
Calculating drawdown and max drawdown
Drawdown at any moment equals (current equity / high-water mark) minus 1, expressed as a negative percentage. The high-water mark is the highest equity the account has ever reached. When equity recovers to a new high, the new high becomes the high-water mark and current drawdown returns to zero. Maximum drawdown is the most negative drawdown reading the account has ever recorded, the worst trough below any peak in the equity curve. A strategy with a max drawdown of 25 percent has at some point lost 25 percent of its peak equity before recovering, even if current drawdown is zero today.
The recovery math
Recovery percentages are calculated against the smaller post-drawdown balance, not against the original peak, so recovery requires a larger percentage gain than the drawdown lost. A 10 percent drawdown needs an 11.1 percent gain to break even. A 20 percent drawdown needs 25 percent. A 30 percent drawdown needs 42.9 percent. A 50 percent drawdown needs 100 percent. A 75 percent drawdown needs 300 percent. The non-linearity is brutal: above 30 to 40 percent drawdown, the recovery required exceeds what most positive-expectancy strategies can realistically deliver inside any reasonable timeframe. Survival therefore depends on capping drawdown well below the catastrophe threshold.
Reading max drawdown for strategy evaluation
Three rules. First, the max drawdown in a backtest is almost always smaller than the live max drawdown, because backtests miss tail events, slippage, and behavioural drift; multiply backtest max drawdown by 1.5 to 2x as a planning estimate. Second, max drawdown should be evaluated against the period the strategy is run over; a 15 percent max drawdown over 5 years means something very different from 15 percent over 6 months. Third, the Calmar ratio (annual return divided by max drawdown) is the standard risk-adjusted return metric for evaluating a strategy across different drawdown profiles, more useful than Sharpe for trading systems with non-normal returns.
Frequently asked
What is drawdown in trading?
Drawdown is the percentage decline in account equity from a recent high-water mark to the current value. It returns to zero when equity recovers to a new high. Maximum drawdown is the largest such decline ever recorded on the account, the worst peak-to-trough fall in history.
How much recovery is needed after a drawdown?
Recovery percentages rise faster than the drawdown lost because they are calculated against the smaller post-drawdown balance. 10 percent drawdown needs 11.1 percent recovery, 20 percent needs 25 percent, 50 percent needs 100 percent. Above 30 to 40 percent drawdown, recovery exceeds what most strategies can deliver.
What is a healthy max drawdown for a trading strategy?
Under 15 percent for a discretionary strategy run at sane sizing, under 20 percent for a systematic strategy that has been backtested and forward-tested. Above 30 percent the strategy is in trouble; above 50 percent it is functionally dead because the required recovery exceeds realistic expectancy.
What this means at the desk
Cap drawdown well below 30 percent. The recovery math beyond that point is rarely realistic.
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