Almost everyone looks first at how much a strategy makes. Experienced traders look at something else first: how far it can fall. That fall has a name, drawdown, and understanding it completely changes the way you judge a trading robot.
What is drawdown in trading?
Drawdown is the peak-to-trough drop in your account: how far it falls from a previous high to the next low, before it recovers. Put simply, it’s how much your capital has shrunk during its worst stretch. If your account rises to 10,000, falls to 8,000 and then climbs again, you’ve been through a drawdown of 2,000 (20%).
It’s usually expressed as a percentage, because that makes it comparable between accounts of different sizes.
Maximum drawdown: the key number
Maximum drawdown is the largest of all those drops over the period analyzed. It’s the metric that really tells you how much pain you would have had to endure to reach the final result. A system can end up well ahead, but if it went through a 60% drawdown along the way, the important question is: would you really have kept the account open at that point?
Why drawdown matters more than returns
Two strategies can finish with the same profit and still be radically different in terms of risk:
- Strategy A makes 40% with a maximum drawdown of 12%.
- Strategy B makes that same 40%, but with a maximum drawdown of 55%.
On paper, they “make the same money.” In real life, B would have had you watching more than half your account evaporate before it recovered: most people close the account (at a loss) long before they reach that happy ending. That’s why drawdown is the best gauge of risk: it measures what you have to endure, not what you’re promised.
The recovery factor relates total profit to maximum drawdown. The higher it is, the more “efficient” the strategy is at generating gains relative to the risk it takes to get them.
How to read drawdown without fooling yourself
There’s no universally “good” drawdown: it depends on your risk tolerance and the type of strategy. But two rules almost always hold: if someone shows you results without mentioning the drawdown, they’re hiding half the story; and a very low drawdown combined with huge returns is usually a sign of over-optimization, not genius.
Frequently asked questions
What drawdown is considered acceptable?
There’s no magic number: it depends on your risk tolerance and the type of strategy. What matters is knowing it in advance and asking yourself honestly whether you could sit through that drop without closing the account.
Is drawdown the same as a loss?
Not exactly. Drawdown measures the drop from a high to the next low, even if the account recovers afterwards. You can have a large drawdown and still end up in profit; it measures the risk you had to endure along the way.
Why be suspicious of a very low drawdown with very high returns?
Because it’s usually the fingerprint of overfitting: a strategy fitted too closely to the past looks almost drawdown-free in a backtest, and then fails in the live market.
At AUREUM we show the drawdown, we don’t hide it
We publish the strategy’s real maximum drawdown alongside the rest of the metrics, because we believe risk should be looked at head-on. The numbers, unfiltered.
See AUREUM’s metrics →