Drawdown (DD) measures the loss of a trading account from its all-time high. It's the most important metric to assess a strategy's real risk — far more telling than annual return alone.
Drawdown types:
- Maximum Drawdown (MDD): largest peak-to-trough decline ever endured. If your account went $10,000 → $7,000 → $12,000, your MDD is 30%.
- Current drawdown: gap between current equity and last high
- Drawdown duration: time to recover a new high after a drawdown
Why drawdown matters more than return: a fund returning +30%/year with 50% drawdown is psychologically untenable. Most traders quit their strategy mid-drawdown — exactly at the worst moment, just before the rebound.
Recovery math: losses are asymmetric. A 50% loss needs a 100% rebound to break even. -10% → +11%. -20% → +25%. -50% → +100%. -90% → +900%. That's why it's better to cap drawdowns early.
Pro benchmarks:
- Quant hedge funds: MDD < 10% target annually
- Solid discretionary retail trader: MDD 15-25%
- Beyond 30%, the strategy is risky and must be reassessed