Drawdown & Recovery Math

In trading, a drawdown is the decline from a previous high point (a "peak") to a later low point (a "trough") before a new high is reached. It can be measured on an account's equity curve or on the price of an instrument. For example, if an account grows to $10,000 and then falls to $8,000 before recovering, that is a 20% drawdown.

Traders often look at maximum drawdown, which is the single largest peak-to-trough drop over a chosen period. It is commonly used to describe how far a strategy or position would have fallen in its worst stretch. Drawdown is a backward-looking, descriptive measure: it tells you what happened, not what will happen. No indicator or statistic predicts future moves, and past drawdown figures do not guarantee anything about future results.

An idea many traders find surprising is that the gain needed to recover from a loss is always larger than the loss itself, in percentage terms. This happens because a loss shrinks the base you are working from, so the recovery has to do more work on a smaller amount of money.

Suppose you have $100 and lose 20%, leaving $80. To get back to $100, you need to gain $20 on a base of $80, which is a 25% gain, not 20%. The deeper the loss, the wider this gap grows. This is sometimes described as the asymmetry of returns. It is a fact about the arithmetic of percentages, not a claim about how any particular position will behave.

The relationship can be written as a short formula. If the loss is L (expressed as a decimal, so 20% is 0.20), then the gain needed to break even is:

required gain = L / (1 - L)

For a 20% loss: 0.20 / (1 - 0.20) = 0.20 / 0.80 = 0.25, or 25%. For a 50% loss: 0.50 / 0.50 = 1.00, or 100%. The formula makes the asymmetry explicit and lets you check any figure yourself. It describes arithmetic only; it says nothing about how likely any recovery is, or how long one might take.

Seeing several figures side by side makes the pattern clear. Using required gain = L / (1 - L):

• 10% loss needs about an 11.1% gain to break even
• 25% loss needs about a 33.3% gain
• 50% loss needs a 100% gain
• 75% loss needs a 300% gain
• 90% loss needs a 900% gain

Notice how the required gain accelerates far faster than the loss. Up to roughly 20%, the gap is modest. Beyond about 50%, it becomes very large, which is why deep drawdowns are often discussed as being especially difficult to climb out of. Again, these are arithmetic facts about percentages, not statements about whether recovery is achievable in any given case.

You can plot a running drawdown on a TradingView chart to see how far price has fallen from its highest close so far. The script below keeps a persistent peak of the highest close since the first bar and shows the current percentage drop from it. It is a minimal example for learning, not a tool to act on.

//@version=6
indicator("Drawdown from Peak", overlay = false)

// running highest close since the first bar
var float peak = na
peak := na(peak) ? close : math.max(peak, close)

// current drawdown as a percentage below the peak
drawdownPct = (close - peak) / peak * 100

plot(drawdownPct, title = "Drawdown %", color = color.red)
hline(0, "Peak", color = color.gray)

Traders often read a value near 0 as price sitting at or close to its running peak, and increasingly negative values as larger declines from that peak. This is a description of past price behaviour only. No indicator is predictive, and all trading carries the risk of loss.