Drawdown and Recovery, explained.
A drawdown is a decline from a previous wealth peak, while maximum drawdown is the largest such decline over a specified history.
Why it happens
Selected returns multiply a starting index of one hundred. Historical peaks define drawdowns; the gain needed to recover is peak divided by current wealth minus one, using the reduced current base.
A drawdown is a decline from a previous wealth peak, while maximum drawdown is the largest such decline over a specified history.
Read the result
Current drawdown can return to zero after recovery while maximum historical drawdown remains recorded. Required gain uses current wealth as its denominator.
A worked example
Lose half, then gain half
Apply a fifty-percent loss to wealth one hundred, leaving fifty.
Apply a fifty-percent gain to the reduced base, leaving seventy-five rather than restoring one hundred.
Compare current drawdown twenty-five percent, maximum drawdown fifty percent and required recovery gain about 33.3 percent.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Selected returns multiply a starting index of one hundred. Historical peaks define drawdowns; the gain needed to recover is peak divided by current wealth minus one, using the reduced current base.
Where this idea is useful
A practical use
Recognise why losing fifty percent requires gaining one hundred percent to recover.
A common misconception
“Equal percentage losses and gains cancel each other.”
Percentage changes apply to different bases after the first move; recovering a loss generally requires a larger percentage gain.
What this explanation leaves out
- The path is authored and short, with no income, fees or trading constraints. Drawdown does not summarise every risk or predict future losses; the thinker link is contextual association.
Does a recovered path erase its maximum drawdown?
No. Maximum drawdown summarises the worst peak-to-trough decline over the recorded history, even after a new peak is reached.
Which denominator is being used for the loss and for the recovery?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.