What is drawdown, and why it hurts

What drawdown actually measures

Drawdown is the percentage decline from the highest point (peak) your account has reached to the lowest point (trough) before it recovers. It's measured on your equity curve — the line that tracks your account balance over time.

If your account grows from ₱30,000 to ₱50,000, then falls to ₱35,000, your drawdown is:

(50,000 − 35,000) ÷ 50,000 = 30%

You're now 30% below your peak.

The cruel asymmetry

Here's the part that surprises new traders: losses and gains are not symmetrical.

If you lose 30%, you need to gain 43% to get back to breakeven. Lose 50%, and you need to double your remaining capital — a 100% return — just to recover.

The math:

• Start: ₱50,000
• Lose 30%: ₱35,000 remains
• To recover: ₱35,000 × 1.43 = ₱50,050

That 43% climb is steeper, slower, and psychologically harder than the 30% fall.

Why professionals obsess over max drawdown

Every strategy — whether it's a trading system, a fund, or your own manual approach — has a maximum historical drawdown: the worst peak-to-trough loss it has ever experienced.

A strategy that averages 50% annual returns sounds great. But if its max drawdown is 60%, most retail traders won't survive it. They'll panic, stop following the rules, or quit entirely during the trough.

Drawdown is the filter that separates theoretical performance from tradable reality.

A local example

Imagine a Makati-based trader starts with ₱100,000. After six good months, the account grows to ₱150,000. Then a rough stretch hits: poor trade timing, a surprise BSP rate hold, and one overleveraged position. The account falls to ₱105,000.

Drawdown: (150,000 − 105,000) ÷ 150,000 = 30%

To get back to ₱150,000, the trader now needs: (150,000 − 105,000) ÷ 105,000 ≈ 43%

That's not six months of work. That could be a year — or more — depending on consistency and market conditions.

Why risk limits exist

This is why experienced traders set hard rules:

• Maximum loss per trade: 1–2% of account equity
• Maximum daily loss: 5%
• Maximum drawdown before taking a break: 10–15%

These aren't arbitrary. They're designed to keep drawdown small enough that recovery is mathematically realistic and psychologically bearable.

Profit is exciting. But drawdown is what kills accounts.

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