A simple example
If an account rises to $10,000 and later falls to $8,000 before making a new high, the decline from peak to trough is 20%.
Historical drawdown is not a limit
A strategy whose historical record shows a small maximum drawdown can experience a larger one in the future. The figure describes the observed sample, not a guaranteed boundary.
Recovery is asymmetric
A 20% loss leaves 80% of the original capital. Returning from 80 to 100 requires a 25% gain. A 50% loss requires a 100% gain to recover.
Drawdown and amplification
When trading exposure is amplified, an underlying strategy drawdown can have a much larger economic effect relative to personally contributed capital. Programme rules may also intervene before a theoretical loss is reached.