What is a Worked Example of Drawdown Review?

Direct answer

A worked example of drawdown review is a transparent numerical walkthrough showing how you calculate drawdown from an equity curve, using stated assumptions. The goal is to make the method independently checkable, so you can explain what the drawdown metric means, how it is measured, and where it can be misleading.

Mechanism or definition

Drawdown review is a process that summarizes how far performance fell from a previous high point. The basic mechanics use a time-ordered performance series (often equity over time) and identify:

A peak: the highest equity value reached up to that time.
A trough: the lowest equity value reached after that peak before a new peak appears.
The drawdown amount: peak equity minus trough equity.
The drawdown percentage: drawdown amount divided by peak equity.

Equity is the value that already reflects gains and losses from open and closed positions. Balance is typically a cash value that may not reflect unrealized profit/loss on open positions. Because providers and reporting formats can differ, a drawdown review starts by fixing which series you will use and how you handle timing (for example, whether you mark equity at trade close, at candle close, or continuously).

Worked numerical example (with explicit assumptions)

Here is one fully specified scenario you can verify.

Assumptions (state these before calculating):

Measurement series is equity at specific checkpoints: after Trade 1, after Trade 2, after Trade 3, and after Trade 4.
Starting equity is $10,000.
Equity values already include all realized and unrealized effects at those checkpoints.
There is no need to assume leverage details because we are directly using the equity checkpoints.
Drawdown is computed from the current peak to the current equity at each checkpoint.

Equity checkpoints:

After Trade 1: $10,500
After Trade 2: $10,200
After Trade 3: $9,700
After Trade 4: $10,300

Step 1: Identify peaks up to each checkpoint.

Up to Trade 1, peak = $10,500.
Up to Trade 2, peak is still $10,500 (no new high).
Up to Trade 3, peak is still $10,500.
Up to Trade 4, equity reaches $10,300, which is below the previous peak $10,500, so peak remains $10,500.

Step 2: Compute drawdown at each checkpoint (peak to current).

Trade 1: drawdown = $10,500 − $10,500 = $0; drawdown% = 0%.
Trade 2: drawdown = $10,500 − $10,200 = $300; drawdown% = $300 / $10,500 ≈ 2.86%.
Trade 3: drawdown = $10,500 − $9,700 = $800; drawdown% = $800 / $10,500 ≈ 7.62%.
Trade 4: drawdown = $10,500 − $10,300 = $200; drawdown% = $200 / $10,500 ≈ 1.90%.

Step 3: Report the maximum drawdown observed in this sequence.

The largest drawdown% among the checkpoints is about 7.62% (at Trade 3).

What this shows: drawdown review does not only measure the worst final outcome; it measures how far you fell from the best point and how that compares in percentage terms.

Limitations and risks (what can go wrong)

Data and definitions risk: If you use equity at different times, or equity vs. balance, your drawdown numbers can change even with the same trades.
Peak identification mistakes: Some reviews look for “maximum trough after each peak” (episode drawdown), while others look at drawdown at every time step (running drawdown). Mixing the two can cause inconsistent results.
Cost and execution effects: If your equity checkpoints omit fees, commissions, slippage, or spread effects, the calculated drawdown will not match a true equity curve.
Failure mode: inconsistent assumptions: If one part of the review uses equity checkpoints and another uses another metric, you can end up comparing incompatible quantities.

A material limitation is that historical drawdown behavior does not establish future outcomes. Even if a method is calculated correctly, the experience you observe can still vary under different market conditions and reporting formats.

Verification or next question

To verify a drawdown review independently, you can:

Recalculate drawdown% using the exact peak value and the exact equity value at the same checkpoints.
Confirm whether your method is running drawdown or peak-to-trough episode drawdown.
Check whether costs and unrealized effects are included in the equity series.