The pain metric
Max Drawdown — The Number That Decides if You Can Trade the Strategy
Sharpe and profit factor tell you if a strategy is profitable. Max drawdown tells you whether you'll have the stomach to actually run it through its worst stretch.
The formula
Max drawdown = (peak equity − trough equity) ÷ peak equity, taken over the worst stretch in the equity curve. Always expressed as a positive percentage.
Why it dominates the other metrics
A strategy with 50% annual returns and a 40% max drawdown looks great on paper — until the drawdown hits and you panic-close at the bottom. The max drawdown is the test of psychological survivability: if you can't sit through it, the backtest's profitability is irrelevant.
Pairing it with recovery time
Two strategies can have the same 20% max drawdown, but one recovers in 3 months and the other takes 18. The Calmar ratio (annual return ÷ max drawdown) and time-to-recovery together give a much more honest picture than drawdown alone.
Put this into practice
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