How Much Drawdown Is Normal

A run of losses, at two shares

A drawdown is the fall from the highest point the account has reached, and how much of one is normal depends on two things: the share risked on each trade, and how long a run of losses lasts. The arithmetic is the whole answer. Three losses in a row at one per cent a trade take the account 3.0 per cent below its high; five take 4.9; ten take 9.6; twenty take 18.2. At two per cent a trade the same runs take 5.9, 9.6, 18.3 and 33.2. Each loss takes its share of what is left, so the falls are a little less than the count times the share. Nothing here forecasts a run. It prices one, before it comes.

The tide mark on a harbour wall

Picture a harbour wall with a tide mark on it, the line the water left at its highest. The water below the mark today is measured down from the mark, not up from the sea bed, and the mark stays on the wall until a higher tide paints a new one. Drawdown is measured that way. The mark is the highest the account has been, 10,800 dollars in the example figures; the water is the account now, 10,271; the drawdown is the gap, 4.9 per cent. An account that has never been below its starting line can still be in drawdown, if it once stood higher than it does today, and that is the case more often than not.

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