A 50% loss needs a 100% recovery.
Losses and gains use different starting amounts. Drawdown measures the drop from an earlier equity peak; recovery measures how much the smaller remaining balance must grow to regain that peak.
Updated 14 Nov 2026 · Original educational material · Hypothetical examples, not live market data
Drawdown is measured from a prior peak.
Suppose a portfolio rises from $10,000 to $12,000, then falls to $7,200. The decline from its latest high is $4,800, or 40% drawdown. The fact that $7,200 is 28% below the original $10,000 does not change the peak-to-trough drawdown.
A drawdown can be measured at any observation below the most recent high-water mark. Maximum drawdown (MDD) is the deepest such peak-to-trough decline over a specified observation period. An open or incomplete recovery should be identified as such rather than treated as a completed historical episode.
Why the recovery percentage gets larger.
After a 20% decline, you hold 80% of your peak capital. Restoring the missing 20 points requires a gain of 20 ÷ 80 = 25% on what remains. At a 50% loss, the account is halved, so reaching the old peak requires doubling: +100%.
| Drawdown | Capital remaining from a $10,000 peak | Gain required from the trough |
|---|---|---|
| −10% | $9,000 | +11.1% |
| −20% | $8,000 | +25.0% |
| −30% | $7,000 | +42.9% |
| −40% | $6,000 | +66.7% |
| −50% | $5,000 | +100.0% |
| −75% | $2,500 | +300.0% |
An account that first grew, then fell.
A $4,800 recovery from $7,200 is a return of 4,800 ÷ 7,200 = 66.7%, even though the original deposit was $10,000. A later account value of $10,000 would recover the starting deposit but still sit about 16.7% below the prior $12,000 peak.
This example assumes no new deposits, withdrawals, fees or taxes. In real portfolios, cash flows must be handled carefully: adding $3,000 of new money can increase account balance without producing a $3,000 investment return. Drawdown comparisons should distinguish net external flows from performance.
Three related metrics that answer different questions.
Current drawdown
How far the latest observed value lies below its earlier peak. A new high returns current drawdown to zero.
Maximum drawdown
The deepest peak-to-trough loss in the selected period. It describes the magnitude of a historical or simulated event, not its likelihood of recurrence.
Capital-floor crossing
Whether the account ever falls below a threshold defined against its starting balance. It is not the same as drawdown measured against a changing peak.
Recovery time and time under water add another dimension: how many observations or calendar days elapse before the account revisits the former high. A position that eventually recovers can still require an impractically long wait or force a change in plans.
Common interpretation errors.
“A 30% loss needs a 30% gain.” No: only 70% of the peak remains, and 30 ÷ 70 ≈ 42.9%. “Maximum drawdown is the worst possible loss.” No: it is the worst decline observed under the selected sampling and time period. Future declines may be worse. “A deposit counts as a recovery.” Not as an investment return; performance must be adjusted for external cash flows.
Frequently asked questions.
Is drawdown the same as an unrealized loss?
No. Drawdown concerns the change in total value relative to a previous high. It can include realized and unrealized P&L as reflected in the account valuation; a specific position's open loss is only one component.
Does maximum drawdown tell me my chance of losing 50%?
No. A measured maximum is a descriptive statistic from one observation period or set of simulated paths. Estimating a probability requires an explicit model or evidence about the distribution of future outcomes.
Does a 100% gain erase a 50% loss?
Yes, mathematically, if measured from exactly half the previous peak: 0.5 × 2 = 1. This excludes fees, taxes, cash flows and all questions of how feasible a doubling may be.
Can leverage change drawdown?
Yes. It can magnify changes in account equity relative to posted collateral, and liquidation can end a position before a hypothetical recovery occurs. Leverage-related outcomes depend on actual margin and contract rules.