Stock Market · Risk Management & Psychology

Drawdown

Drawdown is the peak-to-trough decline in your portfolio. It's the truest measure of trading pain and the primary reason why most traders quit before their strategy has time to work.

What drawdown actually feels like

A 10% drawdown: 'manageable, this is normal'.

A 20% drawdown: 'maybe I should change strategy'.

A 30% drawdown: 'I need to stop trading'.

A 50% drawdown: 'I should never have started'.

> The longer drawdowns last, the more they erode confidence, even if your underlying strategy is sound.

Max drawdown of legendary funds

Even the greatest investors have experienced 20-40% drawdowns:

• Warren Buffett (Berkshire): ~50% peak-to-trough in 1973-74
• Renaissance Medallion Fund: 5-10% max drawdowns (extraordinary)
• Most equity mutual funds: 30-50% drawdowns during 2008 and 2020

Recovery math

10% drawdown → 11% recovery needed

20% drawdown → 25% recovery needed

30% drawdown → 43% recovery needed

50% drawdown → 100% recovery needed

[bars:10% loss=11%|20% loss=25%|30% loss=43%|50% loss=100%]

Personal drawdown limits

Before starting any trading strategy, define your maximum acceptable drawdown.

• If 15%, exit and reassess the strategy when 15% loss is hit.
• This prevents emotional decisions in real-time pain.

Drawdown < 10%comfortable, sustainable

Drawdown 10-20%normal, expected

Drawdown 20-30%strategy review needed

Drawdown > 30%stop, reassess, possibly redesign

Takeaway. Drawdown is the peak-to-trough decline of your portfolio. Set a personal max drawdown limit BEFORE you start trading. When hit, stop and reassess. Don't make emotional decisions while in pain.