Drawdown and underwater period: two numbers that get confused
Maximum drawdown is the largest distance an account falls from its own highest point, stated as a percentage. The underwater period is how long the account stays below that previous high, stated in days. The first tells you how deep the loss was; the second tells you how long it took to recover — and it is usually the second that makes a trader give up on a system.
What each one actually measures
A system can have a shallow drawdown that lasts a very long time, or a deep one that recovers quickly. The two are independent, and neither substitutes for the other.
| Measure | Unit | What it measures | What it does not tell you |
|---|---|---|---|
| Maximum drawdown | per cent | Depth of the worst fall from a peak | How long it lasted |
| Underwater period | days | Longest stretch without a new high | How deep the loss was |
"Underwater" does not mean "losing"
An account below its high water mark is not necessarily down. An account that went from $10,000 to $14,000 and now sits at $12,000 is 20% ahead and underwater at the same time.
The distinction matters because what makes people switch a system off is rarely an absolute loss. It is months without a new high.
Why no real system escapes these stretches
- The length of an underwater period follows from the ratio of return to volatility. Shortening it means raising that ratio, not finding better settings.
- The S&P 500 stayed below its high for about two years after January 2022, and for more than five years after the 2008 crisis.
- A robot claiming it has no such periods has usually deferred the losses instead: holding losing positions open, or covering them with larger size.
How to ask a vendor for these two numbers
- Is maximum drawdown measured on balance or on equity? The equity figure is the stricter and the more honest one.
- How many days was the longest underwater period? If there is no answer, it was never measured.
- Were the figures produced with the broker’s real spread and swap? Without real costs, both numbers flatter the system.
- How long is the test period, and how much of it was seen while the system was being designed?
Frequently asked
- What is the difference between drawdown and underwater period in one sentence?
- Drawdown states the depth of a loss as a percentage; the underwater period states how long recovery took, in days. A system can look good on one and poor on the other.
- Does being underwater mean the account is losing money?
- No. It means the account has not yet returned to its own previous high. An account can be in profit and underwater at the same time.
- Is a long underwater period a sign of a broken system?
- Not necessarily. Every real system has them. The warning sign is a system that claims it does not.
This is educational material, not investment advice. All performance figures are backtest results, not live trading, and are no guarantee of future results.