Orders and risk
Drawdown
Drawdown is the fall in a trading account from a peak to the following low, usually expressed as a percentage of the peak.
Drawdown measures how far your account has fallen from its highest point. If the account peaked at one value and then dropped, the drawdown is the drop divided by the peak. Maximum drawdown is the largest such fall over a period. It is measured on the equity curve, not on any single trade.
It matters because recovery is not symmetrical. A 10 per cent loss needs about an 11 per cent gain to get back. A 20 per cent loss needs 25 per cent. A 50 per cent loss needs 100 per cent. The deeper the hole, the harder the climb, which is why limiting drawdown is worth more than chasing one big month.
Every method has losing streaks. In a sideways market a trend-following approach can take several stop-losses in a row, and that is normal. What turns a normal streak into a damaging drawdown is size: trading futures on thin margin, or buying options with too large a share of the account.
The common mistake is judging a method by its best stretch and never asking about its worst. The second is increasing quantity during a drawdown to win it back. A more useful habit is to set a limit in advance, for example a daily or monthly loss at which you stop trading and review, and then obey it.
Worked example
A 15 per cent drawdown and the gain needed to recover
Illustrative numbers: an account grows from 4,00,000 rupees to a peak of 5,00,000 rupees. A run of losses then takes it down to 4,25,000 rupees. The drop is 75,000 rupees, and 75,000 divided by 5,00,000 is a drawdown of 15 per cent. To get back to the peak from 4,25,000, the account must gain 75,000 divided by 4,25,000, which is about 17.6 per cent.
In WizeBuySell
WizeBuySell does not track your account, your equity curve or your drawdown. Stop-losses do get hit, sometimes several in a row, and some days have no clean trade. Past signals stay on the chart, so you can scroll back and see the losing runs as well as the winning ones. We publish no accuracy figure. Sizing positions and setting loss limits is your responsibility.