Drawdown is the decline from a previous peak to a subsequent value. Balance and equity answer different questions: equity includes open positions.
Name the measurement basis
A percentage without a reference is ambiguous. Is it measured from the preceding peak or initial capital? Does it include only closed trades or open positions too? Record sampling interval and definition before comparing systems.
Loss and recovery are not symmetric
A loss leaves a smaller capital base. The percentage gain needed to recover is therefore larger than the preceding percentage loss. This is arithmetic, not a prediction of whether or when recovery happens.
Do not ignore duration
Two tests with equal maximum drawdown can spend very different periods below their peaks. Report underwater periods and recovery time as well. A drawdown still open at the end of a test must not be described as recovered.
A practical example
Arithmetic example without deposits or withdrawals: falling from €10,000 to €8,000 is a 20% decline. Returning to €10,000 requires €2,000 on an €8,000 base, or 25%. That future gain is not promised.
For your next test
- Distinguish balance and equity drawdown.
- State cash flows and sampling interval.
- Show depth, duration and unrecovered periods together.
Common question
Is historical maximum drawdown a loss limit?
No. Future losses can exceed it. A historical observation is not a technical risk limit.
Sources & further reading
Educational content, not investment advice. Numerical examples are hypothetical, not results of a REVENQOR system.
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