A trader can make 40% in a year and still blow up their account.
How?
Drawdowns.
Very few talk about drawdowns - the thing that usually determines whether a trader survives long enough to enjoy those returns:
Imagine two traders.
Trader A
- Generates 40% annual returns
- Experiences a 50% drawdown
Trader B
- Generates 25% annual returns
- Experiences a 15% drawdown
Most people will choose Trader A after looking at the returns.
Experienced traders often look at Trader B first.
Why?
Because returns are exciting.
Drawdowns are real.
Let’s look at a simple example:
Capital grows from ₹10L → ₹15L
Things are going great.
Then a difficult market phase arrives and capital falls to ₹9L.
Most traders focus on the fact that they made ₹5L at one point.
What matters more is that they lost 40% from the peak.
Drawdown measures exactly this:
The decline from the highest value of your portfolio to the lowest point before a new high is made.
The hidden challenge is that losses and recoveries are not equal.
- Lose 10% → Need 11.1% to recover
- Lose 20% → Need 25%
- Lose 30% → Need 42.9%
- Lose 50% → Need 100%
- Lose 60% → Need 150%
- Lose 70% → Need 233%
The deeper the drawdown, the harder the climb back.
This is why many professional money managers obsess over downside risk.
A strategy that earns 30% annually but regularly loses 50% along the way may be harder to stick with than a strategy earning 20% with controlled drawdowns.
The biggest reason traders fail isn’t always a bad strategy.
It’s often abandoning a good strategy during a painful drawdown.
Most large drawdowns come from:
• Position sizes that are too large
• Excessive leverage
• Concentrated bets
• Changing market regimes
• Ignoring predefined risk limits
A useful mindset shift is:
Don’t ask only, “How much can this strategy make?”
Also ask:
“What is the worst period I may have to survive to earn those returns?”
Because in trading, your return matters.
But your ability to stay in the game matters even more.
What’s the largest drawdown you’ve experienced, and did it change the way you manage risk today?
PS: Whenever you’re deploying algos on Stratzy, please ensure you’re checking the drawdown of an algo before deploying it. Helps you know what you’re getting yourself into better.
