A drawdown is when your trading or investment account goes lower from its all times high in capital. Your account is either making new all time highs or in a drawdown. No trader or investor continually makes all time highs, everyone spends some time in a drawdown. One of the most powerful ways to insure profitability is to minimize drawdowns in capital. It is much easier to make money when you don’t have to spend a lot of time gaining back what you lost. The math of drawdowns works against you as it takes more returns to get back to even than you lost on the way down. If you lose 50% of your money you need a 100% return on your money just to get back to even. A $100,000 account that drops 50% to $50,000 needs a 100% return on the $50,000 left just to get back to $100,000.
Below is the math on getting back to even after a drawdown in account capital.
