Drawdown and recovery: the arithmetic beginners often miss
A percentage loss and an equal percentage gain do not cancel when they are applied to different balances. This is one reason to understand drawdown before becoming impressed by a strategy’s average return.
Calculate from the new balance
If a hypothetical account falls from 1,000 to 800 dollars, it has lost twenty percent. Returning from 800 to 1,000 requires a twenty-five-percent gain. The second percentage is measured against a smaller starting amount.
Separate a dip from a complete story
Historical maximum drawdown describes the largest observed decline under the stated measurement method. It is not a ceiling on future loss. Check whether calculations use closed trades only or include the changing value of open positions.
Test a longer bad sequence
In a spreadsheet, model several consecutive adverse outcomes and include costs. Notice whether the remaining balance changes what positions can be opened under minimum-size or margin rules. An exercise that assumes you can always continue at the same size may not match the product. Understanding this arithmetic helps question promotional charts; it does not make a risky position suitable for any particular reader.
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