Ask most new traders what makes a good strategy, and they'll talk about total return. Ask a professional fund manager, and the first question is almost always: "what's the drawdown?"
What Drawdown Actually Measures
Maximum drawdown is the largest peak-to-trough decline in your account value during a given period. If your account grows from ₹1,00,000 to ₹1,40,000, then falls to ₹98,000 before recovering, that fall from the peak is a ₹42,000 drawdown — or 30% maximum drawdown.
It answers a question total return never does: what's the worst losing streak I would have had to survive to earn this return?
Why This Matters More Than Return
Consider two strategies, both returning 25% over a year:
- Strategy A: Steady climb, maximum drawdown of 8%
- Strategy B: Same final return, but with a 45% drawdown in the middle
On paper they look identical. In practice, almost nobody survives Strategy B emotionally. A 45% drawdown means watching your account nearly halve before it recovers — and most traders abandon the strategy at the worst possible moment, locking in the loss right before the recovery happens.
The Math of Recovery
This is the part that surprises people. A 10% drawdown only needs an 11% gain to break even. But a 50% drawdown needs a 100% gain just to get back to where you started. The deeper the hole, the disproportionately harder it is to climb out.
| Drawdown | Gain Needed to Recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
| 70% | 233.3% |
How to Use Drawdown When Evaluating a Strategy
When you backtest a strategy on MomentumIQ and see the max drawdown figure, ask yourself honestly: could I have psychologically and financially survived that decline without panic-selling or abandoning the system? If the answer is no, the strategy isn't right for you — regardless of how good the total return number looks.
This is also why our backtest reports always include max drawdown alongside CAGR. A 60% CAGR with a 70% drawdown is, for almost every retail trader, objectively worse than a 15% CAGR with a 10% drawdown — even though the headline number looks far less impressive.
