# Drawdown Statistics Also known as: max, average, duration, recovery factor. A Performance, Backtesting & Validation concept (Return/risk metrics) in the LuxAlgo Library, with 1 indicator implementation. ## What are drawdown statistics? Drawdown statistics describe the declines of an equity curve from its running peak: how deep the losses went, how long they lasted, and how quickly the account recovered. The core figures are maximum drawdown (the single worst peak-to-trough loss), average drawdown (the typical depth across all drawdown episodes), drawdown duration (time from a peak until that peak is regained), and the recovery factor (net profit divided by maximum drawdown). Together they profile the downside experience of a strategy far more concretely than volatility does. These statistics exist because compounding is path dependent. A 50 percent drawdown requires a 100 percent gain to recover, so deep holes are disproportionately destructive; and drawdowns, not standard deviation, are what break traders psychologically, trigger fund redemptions, and violate prop-firm loss limits. Duration matters as much as depth: many traders abandon sound systems not because the hole was deep but because it lasted a year. Practitioners care because nearly every drawdown-aware performance measure is built from these numbers, including the [Calmar ratio](https://www.luxalgo.com/library/concept/calmar-ratio/), the [Ulcer Index](https://www.luxalgo.com/library/concept/ulcer-index/), and the [Martin ratio](https://www.luxalgo.com/library/concept/martin-ratio/). The honest caveat is that a backtest's maximum drawdown is a single realization: the live worst case is usually worse, because the historical window simply has not yet contained the strategy's true tail. ## How it's calculated All drawdown statistics derive from the running-peak decline series of the equity curve. ``` peak_t = max(equity_0, ..., equity_t) drawdown_t = (equity_t - peak_t) / peak_t max drawdown = min over t of drawdown_t average drawdown = mean depth of all completed drawdown episodes drawdown duration = bars or days from a peak until equity exceeds that peak recovery factor = net profit / |max drawdown| equity_t: account equity at time t (closed-trade or mark-to-market, which can differ materially) peak_t: highest equity observed up to time t drawdown episode: the span from a new equity peak to the recovery of that peak ``` Drawdowns can be stated in percent or currency; percent is standard for comparability. Intrabar or intraday equity marks produce deeper drawdowns than end-of-day or closed-trade accounting; be consistent when comparing. ## How traders use it - Position sizing: expected maximum drawdown scales roughly with size, so traders back into an acceptable risk level by asking what multiple of the historical drawdown they could survive, often alongside [risk of ruin](https://www.luxalgo.com/library/concept/risk-of-ruin/) estimates. - Strategy monitoring: a live drawdown that exceeds the historical maximum in depth or duration is a common, if blunt, trigger for review or shutdown, and feeds [equity-curve throttling](https://www.luxalgo.com/library/concept/equity-curve-based-throttling/) rules. - Robustness work: because one historical max drawdown is a weak estimate, practitioners use [resampling](https://www.luxalgo.com/library/concept/resampling-tests/) of trade sequences to build a distribution of plausible drawdowns rather than relying on the single observed path. - Expectation setting: average drawdown and typical duration tell a trader what normal feels like, so ordinary rough patches are not mistaken for system failure. - Limitations: all of these figures are backward looking, sensitive to window choice, and systematically optimistic for strategies with rare tail events that the sample happened to miss. ## Drawdown statistics vs. related concepts - **Ulcer Index** (https://www.luxalgo.com/library/concept/ulcer-index/): The Ulcer Index compresses the whole drawdown series into one number by root-mean-squaring the depths, weighting deep and prolonged drawdowns heavily. Drawdown statistics are the underlying raw measurements. - **Standard Deviation** (https://www.luxalgo.com/library/concept/standard-deviation/): Standard deviation measures dispersion around the mean and treats gains and losses symmetrically; drawdown statistics measure only cumulative declines from peaks, which is closer to how losses are actually experienced. - **Risk of Ruin** (https://www.luxalgo.com/library/concept/risk-of-ruin/): Risk of ruin is a forward-looking probability of hitting a fatal loss threshold; drawdown statistics are the historical record that such models are calibrated against. ## FAQ ### What is an acceptable maximum drawdown? It depends on the trader's capital, leverage, and constraints; prop-firm accounts may cap it near 5 to 10 percent while long-term trend followers routinely tolerate 30 percent or more. The workable rule is that the expected drawdown must be one the trader can financially and psychologically survive. ### Why is my live drawdown worse than the backtest's? The backtest max is one draw from a distribution, and longer live exposure gives the tail more chances to appear. Costs, slippage, and mild overfitting compound the gap. Many practitioners plan for 1.5 to 2 times the historical figure. ### What is a good recovery factor? Higher is better since it means more profit per unit of worst pain; values above roughly 3 over a multi-year test are often considered healthy. Like all drawdown measures it is window sensitive and inflated by short tests. ### Is drawdown duration more important than depth? They answer different questions. Depth threatens capital; duration threatens discipline and investor patience. A shallow two-year drawdown ends many strategies in practice even though the account was never in serious danger. ## Implementations in the Library - Drawdown Statistics (LuxAlgo): https://www.luxalgo.com/library/indicator/drawdown-statistics/ ## Related concepts - Sharpe Ratio: https://www.luxalgo.com/library/concept/sharpe-ratio/ - Sortino Ratio: https://www.luxalgo.com/library/concept/sortino-ratio/ - Information Ratio: https://www.luxalgo.com/library/concept/information-ratio/ - Extended Risk-adjusted Ratios: https://www.luxalgo.com/library/concept/extended-risk-adjusted-ratios/ - Martin Ratio: https://www.luxalgo.com/library/concept/martin-ratio/ - Significance of Returns: https://www.luxalgo.com/library/concept/significance-of-returns/ - CAGR: https://www.luxalgo.com/library/concept/cagr/ - Calmar Ratio: https://www.luxalgo.com/library/concept/calmar-ratio/ - SQN: https://www.luxalgo.com/library/concept/sqn/ --- Source: https://www.luxalgo.com/library/concept/drawdown-statistics/ (LuxAlgo Library, the encyclopedia of trading & technical analysis). Free to use with attribution: https://www.luxalgo.com/library/license/