Glossary
What Is Drawdown in Trading?
Drawdown is the decline in account equity from a previous peak to a later trough, usually shown in currency and as a percentage of that peak. Maximum drawdown is the largest such decline in a period. TradingLead measures backtest drawdown on candle-close equity, starting from initial capital, and also reports the duration and recovery of each drawdown episode.
What it means
Drawdown is how far an account's equity has fallen from its most recent high (the peak) to a later low (the trough). If equity grows from ₹1,00,000 to ₹1,20,000 and then drops to ₹96,000, the drawdown is ₹24,000, or 20% of the ₹1,20,000 peak.
Maximum drawdown (max DD) is the largest such decline over the whole test. A drawdown recovers when equity returns to (or beyond) the previous peak. The time this takes, the drawdown duration, matters as much as the depth.
Formula:
drawdown % = 100 × (peak equity − trough equity) / peak equity
Why traders watch it
Return alone hides the path. Two strategies with the same final profit can feel very different if one fell 10% along the way and the other fell 45%. A deep or long drawdown is when traders most often abandon a plan. A 50% loss also needs a 100% gain to get back to the peak.
How TradingLead calculates it
In the backtesting report and Analytics:
- Equity is marked at each candle close, including open-position mark-to-market.
- Initial capital is the first peak, so an immediate loss counts.
- Each drawdown episode records its peak, trough, recovery time (if recovered), amount, percentage and duration. Reaching the old peak exactly counts as recovery.
- The largest amount and the largest percentage are tracked independently, so they can come from different episodes.
- The ongoing (current) drawdown is always reported.
- Drawdown can exceed 100% if simulated equity turns negative.
For Pine strategy() runs, the main report uses the emulator's completed-candle equity. The separate Pine strategy report may include intrabar extremes, so its drawdown can differ. TradingLead does not claim an intrabar drawdown in the main analytics.
The strategy optimizer can also use a maximum drawdown constraint or a drawdown objective when ranking candidates (see the Strategy Optimizer).
Reading it well
- Compare max drawdown with net return and the Sharpe ratio, not in isolation.
- Look at duration and how often drawdowns happen, not just the worst one.
- Candle-close sampling can understate how bad things got within a candle, especially on daily data.
- A backtest's worst drawdown is a past observation, not a limit on future losses.
Limitations
- Candle-close drawdown can understate intrabar losses.
- Historical drawdown does not cap future drawdown.
Frequently asked questions
- What is a good maximum drawdown?
- There is no universal number. It depends on your capital, time horizon and how much decline you could tolerate without abandoning the strategy. Compare drawdown with return, and remember that future drawdowns can be larger than past ones.
- Why can drawdown exceed 100%?
- If simulated equity falls below zero, for example with leverage or short positions, the fall from the peak is more than the peak itself. TradingLead reports that rather than capping it.
- Does TradingLead include intrabar lows in drawdown?
- The main backtest drawdown uses equity marked at each candle close, so intrabar swings are not included. The separate Pine emulator summary may include intrabar extremes and is labelled differently.
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