Drawdown

A measure of decline rather than of level. A running high water mark is kept, and drawdown is the distance the account has fallen below it. Current drawdown is measured to the present moment. Maximum drawdown is the largest such fall over a period, and is the figure most often quoted when a record is described, because a final result says nothing about the path taken to reach it.

Balance and equity produce two different answers, and the gap between them is the most common misreading. A balance figure changes only when a position closes, so balance drawdown counts realised losses. Equity includes the running value of open positions, so equity drawdown counts an adverse move while it is still happening. An account can show no balance drawdown at all while carrying a large equity drawdown, and it is equity that margin is measured against.

The arithmetic of recovery is asymmetric, and the asymmetry grows quickly. Returning to a peak requires a larger percentage gain than the percentage fall that caused the drawdown, because the gain is calculated on the smaller amount that remains. Practitioners disagree about which figure matters more: the depth of the worst fall, or how long the account spent below its high water mark, on the argument that a shallow decline lasting years is the harder one to sit through.