Max drawdown vs average drawdown, and why you plan around the max
Max drawdown is the deepest peak-to-trough fall; average drawdown is the typical dip. Read both: you plan around the max and set expectations by the average.
Max drawdown and average drawdown answer two different questions. Here is what each one tells you, why they diverge, and why the number you size your account around is always the bigger of the two.
Two numbers, two questions
A drawdown is the fall from an equity high to the low that follows it, before a new high is made. If that idea is new, start with what drawdown is. Any track record has many drawdowns, most small, a few large, and the two headline statistics summarize that collection differently.
- Maximum drawdown is the single deepest peak-to-trough fall in the whole record. It happens once. It answers: how bad did it ever get?
- Average drawdown is the typical depth of the dips. It happens all the time. It answers: what does a normal stretch actually feel like?
The max is about survival. The average is about expectations. You need both, because a system that is survivable but constantly uncomfortable gets switched off just as surely as one that blows up.
You experience the average drawdown most of the time, but you have to survive the maximum one. So you set your expectations with the average and you size your account with the max. Confuse the two and you will either be surprised by the worst day or panicked by an ordinary one.
What average drawdown is
Average drawdown describes the everyday texture of the equity curve: the routine dips below a recent high that happen constantly and resolve quickly. In this backtest, and in most records, it is far shallower than the maximum. It is the number that tells you what a normal week or month feels like when nothing dramatic is happening.
This is the more honest guide to your day to day experience, and it is the one people ignore. They read the max, brace for it, then get rattled by a perfectly ordinary dip because they never formed a picture of normal. A system whose target sits at three times its risk produces small dips constantly as pure arithmetic. That is not the system breaking; it is the system working, and the tie between reward-to-risk, win rate and the shape of the equity curve is in risk, reward and win rate.
| Worst drawdown of the period | Average annual drawdown | |
|---|---|---|
| What it measures | Deepest peak-to-trough fall, once | Typical depth of a year's dips |
| The question it answers | How bad can it get? | What does a normal stretch feel like? |
| Use it to set | Account size and survival | Expectations and patience |
Why you plan around the max
Imagine the system with the same small average drawdown. One has a maximum of $4,000, the other $20,000. On a normal day they feel identical. But the second will, at some point, hand you a fall five times deeper than anything you were used to, and if your account was sized for the average, that is where it ends.
This is why the average, on its own, is dangerous: it is comfortable precisely because it excludes the event that matters most. Planning around the maximum is not pessimism; it is how you stay in the game when the average shows up again on the far side of the worst stretch. Most people who fail with a working system fail exactly here, which is the theme of risk and a recurring point in how much a trading bot makes.
The average tells you what most of your days look like. The maximum tells you what one of them will look like, and whether you will still have an account afterward.
Reading a track record honestly
Two more things belong beside the drawdown figures. First, recovery time: how long the equity curve stayed underwater before a new high, because a shallow drawdown that lasts a year is its own kind of hard. Second, the reward-to-risk geometry, because a target set at three times the risk tells you upfront that losing runs are normal and the drawdowns are features of the design, not signs it has stopped working. Together those describe the experience; the profit figure alone never does.
Frequently asked questions
Can a real drawdown be worse than the backtested maximum?
Yes, and you should assume it can. A backtest records the worst fall that happened over the tested period; it cannot record a worse one that has not occurred yet. Live execution, slippage and market conditions the data never contained can all push a real drawdown past the historical maximum. That is why you size with headroom rather than sizing exactly to the backtested figure, and why past performance never guarantees future results.
- CME Group, "Micro E-mini Futures" contract specifications.
- Perry J. Kaufman, "Trading Systems and Methods," on drawdown measurement and system evaluation.
- CFTC, "Customer Advisory: Be Cautious of Trading Systems and Robots."
Educational content, not investment advice. Trading futures involves substantial risk of loss and is not suitable for every investor. Any reference to Algomyth results is hypothetical, simulated over historical data, and shown in full on the performance page; past performance does not guarantee future results.
What would you have made?
Pick a start date, a capital and your markets, and run them against the record of the engines, priced at today's point values. Hypothetical, honest, and yours in thirty seconds.
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