Drawdown
Also known as: max drawdown, MDD, equity drawdown, peak-to-trough loss
Drawdown is the peak-to-trough decline in account equity over a defined window, expressed as a percentage of the prior peak, and is the single most reliable predictor of whether a trader will quit a strategy.
Drawdown matters because traders are humans, and humans abandon systems during drawdowns they did not model for. A strategy with a backtested twenty percent max drawdown will produce real-world drawdowns past twenty percent some fraction of the time, and the trader who did not expect that will close the strategy at the worst possible moment.
The useful versions are max drawdown (worst peak-to-trough in the sample), average drawdown (mean of all drawdown periods), and time in drawdown (how long the account spends below its prior peak). The last is psychologically the hardest. A ten percent drawdown that lasts six months feels worse than a twenty-five percent drawdown that recovers in three weeks, and traders quit the slow one more often.
The fix is to size positions so the modeled worst-case drawdown is one the trader can actually live through emotionally, not just financially.
Series of cumulative-P&L values and the percentage gap between each point and its running maximum.
Plotted on the Equity Curve widget; an input to the Risk-of-Ruin estimate on the diagnosis.
Paul Tudor Jones doesn't talk about prediction, he talks about defense — a 5-to-1 reward-to-risk minimum, never averaging losers, and cutting size in a drawdown. Here's how each shows up as a number in your own trade history.
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