Drawdown

A drawdown is the decline in a trading account’s equity from a peak to a subsequent low, usually expressed as a percentage of that peak. Every time your equity curve dips below its previous high, you are in a drawdown; it ends only when equity makes a new high. Drawdowns are not a sign of a broken strategy — they are the normal cost of running any strategy that loses sometimes, which is all of them.

A drawdown has two dimensions: depth (how far equity fell) and duration (how long until the old peak was reclaimed). Traders fixate on depth, but duration is often what breaks discipline — watching an account go nowhere for four months tests conviction more than one bad week.

Example

An account grows from ₹5,00,000 to a peak of ₹6,20,000, then a losing streak takes it to ₹5,45,000 before it recovers.

Drawdown = (6,20,000 − 5,45,000) ÷ 6,20,000 = 12.1%

Note the reference point: the fall is measured from the ₹6,20,000 peak, not the starting capital. The account is still up ₹45,000 overall and yet 12.1% underwater from its high — both statements are true at once. Hypothetical numbers.

Why it matters

For systematic traders, expected drawdown determines position size and psychological survivability. A strategy’s equity curve will spend most of its life somewhere below a previous peak, so knowing the typical depth and duration of dips — and stress-testing them with Monte Carlo simulation — is what keeps you from switching off a working system at its low. The single deepest dip gets its own metric: max drawdown.

In INDfolio AI, every backtest plots the full equity curve with its drawdowns visible — see Backtesting.