Drawdown is the running peak-to-trough decline of an equity curve. At any time t it equals (peak_to_date − equity_t) / peak_to_date, expressed as a non-positive percent. A new equity high resets the drawdown to zero.
Drawdown is the single most important risk measure for a trading system because it captures the psychological cost of running it: a strategy with a 25% maximum drawdown is hard to stick with even if its expected return is strong. Investors regularly abandon perfectly profitable systems mid-drawdown.
Two related stats: drawdown duration (how many bars from peak to recovery) and underwater curve (drawdown plotted over time). The Calmar and MAR ratios use maximum drawdown in the denominator to measure return per unit of pain.
Formula
DD_t = (Peak_t − Equity_t) / Peak_t, Peak_t = max_{s ≤ t} Equity_sExample
Equity peaks at 12,000, falls to 9,600. Drawdown = (12,000 − 9,600) / 12,000 = 20%.
How Noon Barbari uses Drawdown
Every concept here is implemented in the platform. Open the relevant docs or tool to see it in action.
Drawdown recovery calculator →Related terms
- Risk
Maximum drawdown
The deepest peak-to-trough decline observed across the entire equity curve.
- Statistics
Calmar ratio
Annualized return divided by absolute maximum drawdown. Pain-adjusted return.
- Statistics
Sharpe ratio
Excess return over the risk-free rate per unit of total volatility.
- Risk
Risk per trade
Dollar amount (or % of equity) you lose if the stop on a single trade hits.