Drawdown and the mathematics of recovery
How drawdown is measured from an equity peak and why recovery returns become larger as losses deepen.
Drawdown is measured from a prior peak
Drawdown is not merely the percentage loss on the latest trade. It measures how far current equity sits below a prior equity high. A fall from 10,000 to 8,000 is a 20% drawdown.
Recovery is asymmetric
After a 20% loss, capital is 80% of its previous level. Gaining 20 on a base of 80 requires 25%. After a 50% loss, the remaining capital must double, requiring 100% to return to the peak.
Why this matters for risk sizing
A large single loss or several correlated losses can sharply increase the return required just to recover. Fixed-percentage risk has the useful property of reducing the next trade's cash risk as account value falls.
Current versus maximum drawdown
Current drawdown describes the present decline from a peak. Maximum drawdown is the deepest peak-to-trough decline in the measurement period. Strategy comparisons are meaningful only when the period and equity/balance basis are consistent.
Use scenario tools together
Check drawdown, required recovery return and consecutive-loss scenarios to view capital resilience from complementary angles.
Last reviewed: 2026-08-31