What equity drawdown means

Equity drawdown is how far account equity has fallen from a high point, measured against that high point. If equity reached 12,000 and later stood at 9,000, the fall is 3,000, and 3,000 divided by 12,000 is 25 percent. The percentage uses the peak, not the balance the account started with.

Peak to trough

Goldberg and Mahmoud describe maximum drawdown as the largest drop from peak to trough over a chosen horizon, in their paper Drawdown: from practice to theory and back again. The maximum is the deepest of those drops. A smaller drop earlier in the same series is still a drawdown. It is just not the maximum.

The formula for one drop is straightforward. Subtract the later low from the peak, then divide by the peak, then multiply by 100 if you want a percent. A peak of 12,000 and a later low of 9,000 is (12,000 - 9,000) / 12,000, which is 0.25, or 25 percent.

The starting balance answers a different question: how the account compares with where it began. That comparison can be smaller than the drawdown, because the account may have risen before it fell.

One path, two percentages

These figures are a worked example, not a recorded run. Equity starts at 10,000, rises to 12,000, and then falls to 9,000.

From the start, 10,000 to 9,000 is a fall of 1,000. Divided by 10,000, that is 10 percent.

From the peak, 12,000 to 9,000 is a fall of 3,000. Divided by 12,000, that is 25 percent.

Both numbers describe the same three balances. The 10 percent figure compares the end with the start. The 25 percent figure is the drawdown, because the peak was 12,000.

If equity later climbs back to 12,000, the episode is over. The 25 percent fall still happened. A report that only shows the ending balance can hide it. What the Sharpe ratio hides is about a related gap: two paths can share an ending value while one of them fell further along the way.

How Tradee counts it

Tradee computes the percent as (peak - value) / peak. An episode starts when equity is below its running peak and ends when equity gets back to that peak or above it. If the series ends while equity is still under the peak, that unfinished stretch still counts, using the lowest percent reached in it.

The reported maximum is the deepest episode in the series, as a positive percent. A 25 percent drawdown is stored as 25, not as a negative return. An average of the episode depths is a separate number. It is not a softer name for the maximum.

A backtest shows this percentage with the other results of the run. The path above is a worked example you can recompute by hand. A first backtest is where the same calculation is applied to a strategy's equity.