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[Info] [Info] Max drawdown explained: recovery math and sizing
The number to check before return is max drawdown (MDD). Two strategies with +50% are completely different if one got there through −10% and the other through −45%.
What MDD is
- The largest fall from a peak, as a percentage.
- Example: $10,000 → $13,000 (peak) → $9,100 (trough) gives MDD = (13,000 − 9,100) ÷ 13,000 = 30%
Return needed to recover
| Drawdown | To get back to even |
|---|---|
| −10% | +11% |
| −20% | +25% |
| −30% | +43% |
| −40% | +67% |
| −50% | +100% |
| −70% | +233% |
Recovery gets exponentially harder as drawdown grows. That's why pros manage drawdown before profit.
Balance MDD vs equity MDD
- Balance-based: only closed trades. Open losing positions make it look smaller.
- Equity-based: includes open positions. This is the real drawdown.
- Martingale and grid EAs show a huge gap between the two.
Past MDD is only the minimum
- A backtest or live MDD is the worst so far. The future can be worse.
- A common rule of thumb: plan for live MDD reaching 1.5–2× the backtest MDD.
Applying it to your money
- Decide how much loss you can stand, e.g. 20% of the account
- Take the strategy's past MDD × 1.5 as the expected worst case, e.g. 12% × 1.5 = 18%
- 18% ≤ 20%, so it fits. If you get 25%, lower the leverage or lot size.
How the EADesk risk score works
- MDD under 10%: level 1; 10–20%: 2; 20–35%: 3; 35–50%: 4; 50%+: 5
- Under 30 days of history adds one level (drawdown may not have shown yet)
In Paper copy, the recommended leverage keeps "trader's max drawdown × leverage within 30%."
