Drawdown: the recovery is bigger than the fall

The denominator changes

A $10,000 account that loses 20% falls to $8,000. Recovering the lost $2,000 requires a gain of 25% on the remaining $8,000. At a 50% loss, the required recovery is 100%. These are mathematical relationships, not estimates of how quickly a strategy will recover.

Use a consistent measure

Drawdown normally describes a decline from a prior peak to a subsequent low. An investor should ask whether that is measured on equity or balance, and at what sampling interval. An end-of-day calculation can miss a deeper loss that happened earlier that day.

A historical maximum is an observation, not a promised future limit. An account-level stop can be part of a plan, but gaps, execution and platform availability can prevent an exit at the exact intended level.

Time matters too

Two strategies may have the same maximum drawdown but very different experiences. One recovers within weeks; another remains underwater for years. Look at the duration and frequency of declines as well as their size.

Also look at how recovery was achieved. Increasing exposure after losses may bring the balance back faster while making the next decline more dangerous. A smooth recovery line is not enough without trade-size context.

Before choosing an allocation

• Translate a percentage decline into an amount of money you could actually lose.
• Ask for equity drawdown and recovery duration over the complete record.
• Stress a larger decline than the historical maximum.
• Decide in advance what would make you reduce, pause or exit an allocation.

Try the arithmetic

The Risk Lab calculates recovery as loss ÷ (1 − loss), with the loss entered as a fraction. It illustrates the relationship only. It does not recommend an allocation or predict a recovery.