In trading, profits often get the most attention. But over time, many traders realise that what really impacts long-term performance is not just how much is made, but how much is lost during difficult phases.
Consider a simple example:
Capital moves from ₹10L → ₹12L → ₹9L
On the surface, there were profits. But eventually, those gains were given back.
This drop from the highest point to the lowest point is known as drawdown.
Drawdown = (Peak − Trough) / Peak
Example:
Peak = ₹12L
Trough = ₹9L
Drawdown = 25%
One important aspect that often gets overlooked:
Recovering from losses is not symmetrical.
• A 25% loss requires ~33% gain to recover
• A 50% loss requires 100% gain
• A 60% loss requires 150% gain
• A 70% loss requires over 200% gain
As drawdowns increase, recovery becomes significantly more difficult.
Now consider two approaches:
Strategy A: Higher returns but deeper drawdowns
Strategy B: Slightly lower returns but controlled drawdowns
Different participants may view this trade-off differently depending on their approach and risk tolerance.
Drawdowns can occur due to several factors:
• Larger position sizing relative to capital
• Changing market conditions or volatility
• Temporary underperformance of a strategy
• Aggressive risk-taking during uncertain phases
Managing downside often involves focusing on:
• Position sizing relative to risk
• Maintaining consistency during losing phases
• Avoiding excessive exposure in uncertain conditions
• Following a defined process
Over time, many traders shift focus from only returns to also understanding risk and drawdowns.
Different experiences can offer useful insights into how traders manage this balance.
How do you approach drawdowns in your trading journey?