Headline return is only half the story
Imagine two strategies both finish a year up 30%. Strategy A experiences a maximum drawdown of 8%, while Strategy B falls 35% before recovering. Their final return is identical, but the path and risk are very different.
What drawdown measures
Drawdown is the decline from a previous account peak to a subsequent low. If an account reaches $12,000 and then falls to $10,800 before making a new high, that decline is 10% from the peak.
Losses require larger percentage recoveries
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
This asymmetry is why large drawdowns matter so much. A 50% loss does not require a 50% gain to recover; the remaining capital must double.
Compare return and drawdown over the same period
A strategy showing strong return over three months should not automatically be considered superior to one with a lower return documented over several years. Track-record length, number of trades and different market conditions affect how much confidence the figures deserve.
Amplification magnifies the importance of drawdown
When a programme amplifies exposure or allocated trading capital, relatively small movements in the underlying strategy can translate into much larger changes relative to contributed capital. That makes downside modelling particularly important before focusing on compounded upside.
There is no universal “good” ratio
Return relative to drawdown is useful for comparison, but a single ratio cannot capture custody, execution, leverage, fees or the possibility that future drawdown exceeds historical drawdown. Treat it as one part of due diligence rather than a safety score.
A better comparison checklist
Put net return, maximum drawdown, recovery time, track-record duration, trade count and fees next to each other. Then ask whether you could realistically tolerate a drawdown larger than the one already observed.
Calculate how much recovery a drawdown requires →