Drawdown is the price of returns

What is drawdown

A drawdown is the decline in portfolio value from a local peak to a local trough. The maximum drawdown is the deepest such decline over a period. If a portfolio grew from 100 to 130, fell to 104, and then reached a new high, its drawdown was −20%.

Drawdown is not an abstract metric but the primary test of psychological compatibility with an investment: it is at the lowest point that investors most often make the worst mistake — locking in a loss and exiting.

Why it cannot be avoided

Returns arise from taking on risk: assets capable of outpacing inflation inevitably fluctuate. A strategy with no drawdowns is either a deposit account or a fraud. The honest question is different: what drawdown can you endure without pressing the 'sell everything' button?

Algorithms do not eliminate drawdown, but they manage it: hard limits, automatic position reduction, and stress tests keep declines within pre-defined bounds. Every I-Trade strategy has a drawdown limit — a parameter you see before subscribing.

Strategy selection rule

A practical rule: take the strategy's maximum historical drawdown and multiply by 1.5 — the future can be worse than the past. If that figure in monetary terms (not percentages!) does not cost you sleep, the strategy is right for you.

The conservative Atlas with a drawdown of −4.8% and the aggressive Quant with −19.7% can both demonstrate equally sound algorithmic performance — the difference is only in the price each pays for its expected returns.

How algorithms behave during a drawdown

Unlike a human, the algorithm does not experience fear during a drawdown — it executes the protocol: reduces leverage, raises the confidence threshold, shifts part of the portfolio into defensive assets. Every such action is logged and recorded in I-Trade Chain — you can trace the decision logic on the most difficult days.

This material is for informational purposes only and does not constitute individual investment advice. Investing involves risk.