Maximum drawdown and recovery: why a 20% loss needs 25%

A loss from your entry price and a drawdown answer different questions. An account can be profitable since inception while sitting well below its highest value.

At each observation, record the highest value reached up to that point. Compare the current value with that running peak, never with a high that occurs later in the series.

Drawdown = (prior peak − current value) ÷ prior peak. Multiply by 100 to express it as a percentage. This guide reports the decline as a positive magnitude; some platforms display a negative number.

Maximum drawdown is the largest of those declines within the observation period. It is a historical measurement, not a limit on the next loss.

Use positive portfolio equity or a cash-flow-adjusted performance index. The simple percentage formula is not a useful recovery model when the denominator is zero or equity has become negative.

Consider four successive account valuations, in the same currency, with no deposits or withdrawals. These are invented numbers, not a backtest or live trading record.

The period return is 11,500 ÷ 10,000 − 1 = 15%. The maximum observed drawdown is (12,500 − 10,000) ÷ 12,500 = 20%. Both results describe the same path.

At the last observation, the gain still needed to reach the old peak is 12,500 ÷ 11,500 − 1 ≈ 8.70%, not 8%. Use the current value, not the earlier trough, for the remaining recovery requirement.

End-of-day observations can miss an intraday low. Compare drawdowns using the same period, valuation frequency, currency, and cost treatment.

• Observation 1: 10,000; running peak 10,000; drawdown 0%.
• Observation 2: 12,500; running peak 12,500; drawdown 0%.
• Observation 3: 10,000; running peak 12,500; drawdown 20%.
• Observation 4: 11,500; running peak 12,500; current drawdown 8%.

Let P be the positive starting peak and d the loss fraction, with 0 ≤ d < 1. A 20% decline means d = 0.20, leaving P × (1 − d).

Let g be the gain required from that smaller balance. To recover the old peak, P × (1 − d) × (1 + g) = P.

Cancel P and solve: g = 1 ÷ (1 − d) − 1 = d ÷ (1 − d). For percentage inputs, recovery gain (%) = 100 × loss (%) ÷ (100 − loss (%)).

For a 20% loss, 0.20 ÷ 0.80 = 0.25, or 25%. Starting with 100 units, falling to 80 and then gaining 25% restores 100.

A 20% rebound would only produce 80 × 1.20 = 96. Adding −20% and +20% hides the changing denominator; the actual two-period return is −4%.

The same equation works for any unchanged currency unit. Assume no external cash flows and measure the gain after any costs already included in the balance.

At a 100% loss, nothing remains to compound: the formula divides by zero. An option that has expired worthless cannot recover by waiting for the underlying to move later.

These thresholds describe arithmetic only. They do not estimate a success probability, recommend a trade, or establish a recovery deadline.

• A 10% loss leaves 90 of every 100 and needs about 11.11% to recover.
• A 20% loss leaves 80 and needs 25%.
• A 25% loss leaves 75 and needs about 33.33%.
• A 50% loss leaves 50 and needs 100%.
• An 80% loss leaves 20 and needs 400%.

Two successive 20% losses are not a 40% total loss. From 100 units, 100 × 0.80 × 0.80 = 64: the combined loss is 36%.

Recovering from 64 to 100 requires 100 ÷ 64 − 1 = 56.25%. Recalculate from the remaining balance rather than adding the separate loss percentages.

Drawdown depth also says nothing about elapsed time. A decline from 100 to 80 followed by 100 has the same depth whether the observations span days or years.

Define whether duration runs from peak to trough or from peak to full recovery. When the old peak has not been regained, report the recovery as unfinished rather than inventing an end date.

[CFA Institute's performance overview](https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/portfolio-performance-evaluation) includes both maximum drawdown and duration.

Suppose 10,000 falls to 8,000. Depositing another 2,000 restores the account balance to 10,000, but the deposit is not a 25% investment return.

For a simple unitized record, start with 100 units worth 100 each. After the loss, each unit is worth 80. The new 2,000 buys 25 additional units at 80.

You now own 125 units worth 80 each. The account totals 10,000, but the unit value remains 20% below its earlier peak. Withdrawals likewise should not automatically be counted as trading losses.

[GIPS methodology](https://www.gipsstandards.org/standards/gips-standards-for-firms/gips-standards-handbook-for-firms/) separates external cash flows from time-weighted performance.

Keep a dated cash-flow ledger and a consistent valuation method. Raw balance changes alone cannot separate investment returns from money added or removed.

Assume an account peaks at 20,000 and includes a purchased option worth 1,000. The option drops to 600 while every other asset and liability stays unchanged; ignore costs.

The option has lost 40% and needs 1,000 ÷ 600 − 1 ≈ 66.67% to regain its own starting value. Account equity falls to 19,600: a 2% drawdown requiring about 2.04% to recover.

[OIC's leverage explanation](https://www.optionseducation.org/optionsoverview/leverage-risk) notes that leverage magnifies percentage losses and purchased options can lose the full premium.

For futures, use account equity consistently rather than the posted margin as your portfolio denominator.

[CME's margin guide](https://www.cmegroup.com/education/courses/introduction-to-futures/margin-know-what-is-needed) treats margin as collateral.

A recovery percentage does not remove funding constraints. Read equity versus cash balance before comparing a futures statement with a portfolio value chart.

For the next statement review, write down the measurement convention before interpreting the biggest decline. Use this checklist to make another person's calculation reproducible.

Returning to an old nominal balance is not automatically recovering purchasing power or matching a benchmark. Currency conversion, inflation, and omitted costs can change those separate comparisons. [!TRYMARK] TryMark drawdown review At the next statement date, compare current equity with its prior peak. Recalculate the gain needed to regain that peak after checking open-position marks, costs, and deposits or withdrawals. [!WARNING] A recovery hurdle is not an instruction to increase risk A larger required gain does not justify a larger position. This arithmetic cannot guarantee recovery or prevent further losses, and it stops being a meaningful percentage model at zero or negative equity.

For trade-level averages, see win rate and expectancy. For position exposure, see futures sizing. Neither metric replaces a full account history.

• Specify the start and end dates, valuation frequency, and one reporting currency.
• Use only peaks that occurred before the corresponding lower observation.
• Include open-position valuations and identify fees, distributions, and external cash flows.
• Report maximum drawdown, current drawdown, remaining recovery gain, and whether recovery is unfinished.