Drawdown asymmetry punishes big losses
A drop always needs a larger percentage gain to undo it, so capping drawdown protects compounding more than chasing upside does. See the full curve on the drawdown recovery calculator.
The worst peak-to-trough drop in your portfolio — the number risk managers watch
Max drawdown = (trough_value − peak_value) ÷ peak_value × 100. If your account hit $3,200 then fell to $1,800 before recovering, max drawdown is (1800 − 3200) ÷ 3200 = −43.75%. That's the full loss at the worst point regardless of where it ended up.
A 44% drawdown requires a 78.6% gain to recover. Time to recovery depends on your strategy's average return rate — the drawdown recovery calculator shows this. In real trading, drawdown depth is one of the best predictors of strategy abandonment: people stop trading when losses exceed psychological tolerance, locking in the loss permanently.
Targeting a maximum drawdown of 20–25% is common for systematic strategies because it keeps recovery plausible within a year at typical return rates. Allowing 50%+ drawdowns means you need 100%+ returns to recover — which is a different kind of trading entirely.
Related: drawdown recovery time, Calmar ratio, recovery plan.