In this guide
A drawdown measures a decline from a peak reached along a stated path. A loss percentage needs its reference named: a decline from your starting value can differ from a decline from a later peak. An amount that rose from 100 to 120 and then fell to 96 is 4% below its start but 20% below its peak.
Start with the reference value
Here, drawdown is a positive decline magnitude. At observation k, let V(k) be the current positive value and H(k) the highest value observed so far, including the current observation. The proportional drawdown is D(k) = [H(k) − V(k)] / H(k). Multiply by 100 to display it as a percentage.
A negative peak-relative return uses the opposite sign: a 20% drawdown corresponds to a −20% return from that peak. Label the convention before comparing figures. A return from the original starting value instead uses that starting value as its denominator. Neither calculation, by itself, tells you what cash was realized.
The denominator matters in other percentage calculations too. The base and quote currency guide shows why changing the reference changes the percentage.
Follow the observed path, not just its endpoints
The following paths are invented and measured in currency units (CU). Path A has four ordered snapshots: 100, 120, 96 and 108. Path B has two: 100 and 96. There are no deposits, withdrawals, distributions, fees, taxes, borrowing or leverage in either path. The snapshots are observations, not executable exit prices.
| Path / snapshot | Value (CU) | Running peak (CU) | Return from start | Current drawdown | Observed maximum drawdown |
|---|---|---|---|---|---|
| A / 0 | 100 | 100 | 0% | 0% | 0% |
| A / 1 | 120 | 120 | +20% | 0% | 0% |
| A / 2 | 96 | 120 | −4% | 20% | 20% |
| A / 3 | 108 | 120 | +8% | 10% | 20% |
| B / 0 | 100 | 100 | 0% | 0% | 0% |
| B / 1 | 96 | 100 | −4% | 4% | 4% |
Compare A at 96 with B at 96. Both started at 100, so both have a −4% start-relative return. A first reached 120, giving (120 − 96) / 120 = 20% drawdown. B’s highest observed value is 100, giving (100 − 96) / 100 = 4%. Their endpoints match, but their observed histories differ.
At A’s final snapshot of 108, the start-relative return is +8%. Its current drawdown is 10%, while its maximum observed drawdown remains 20%: the largest D(k) in the observations so far. Being above the start does not mean being back at the peak.
Why a 20% decline needs a 25% gain
A decline and the gain needed to reverse it begin from different amounts. From 100 to 80, the fall is 20 / 100 = 20%. From 80 back to 100, the required increase is 20 / 80 = 25%. The same arithmetic applies from 120 to 96 and back.
| Reference (CU) | Lower value (CU) | Decline from reference | Gain from lower value to reference |
|---|---|---|---|
| 100 | 80 | 20% | 25% |
| 120 | 96 | 20% | 25% |
| 120 | 108 | 10% | 100/9% ≈ 11.111111…% |
For 108 to reach 120, the increase is 12 / 108 = 1/9 of the lower value, or 100/9%. These are arithmetic targets. They say nothing about whether a recovery will occur, how long it would take or what an actual sale would realize.
What the observations leave unknown
The maximum in this ledger is the maximum observed across its stated snapshots. Values between those snapshots are unknown. A different observation schedule can reveal a different peak or trough; this ledger does not establish a continuous intraperiod maximum or cap future declines.
Real account records also need cash flows and costs treated explicitly. A percentage change alone cannot classify every drawdown as temporary, unrealized or realized. For an actual exit, the early-exit discussion explains why execution details matter.
Measuring an observed decline is a different task from choosing a planned loss or position size. See the risk–reward guide’s treatment of costs and units for that separate question. The examples here recommend no risk limit or trade size.
Common questions about drawdown
Is drawdown the same as the loss on my original amount?
Only when the relevant reference values coincide. At A’s 96 snapshot, the return from the original 100 is −4%, while the decline from the observed peak of 120 is 20%.
Can I be above my starting value and below a later peak?
Yes. A’s value of 108 is 8% above its start of 100 and 10% below its observed peak of 120.
Is current drawdown always the observed maximum?
No. A’s current drawdown falls to 10% at 108, but the earlier 20% decline remains the largest in its observed record.
Why does a 20% decline need a 25% gain to reverse it?
The decline uses the higher value as the denominator; the return trip starts from the lower value. Twenty units are 20% of 100 and 25% of 80.
Does the recovery calculation tell me when to expect a rebound?
No. It states the gain needed to reach a reference value, without estimating its likelihood or timing. It is not a recovery promise or a future-loss limit.
Explore HypaForecast markets
Browse market questions or check the current 5-minute and 15-minute BTC round details. These navigation links are separate from the fictional measurements in this guide.
Sources and scope
- Chung-Han Hsieh, On Data-Driven Drawdown Control with Restart Mechanism in Trading, arXiv2303.02613v1 (5 March 2023), §2.2, Definition 2.1. Used for the percentage-drawdown definition; the paper’s control strategy and results are outside this explanation.
The paths, ledger and recovery calculations are original fictional examples. They describe only the stated observations and assumptions.
HypaForecast publishes educational guides and operates a prediction market. These fictional measurements do not establish a HypaForecast drawdown tool, a loss limit, a recommended trade size or your eligibility to trade.
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