Equity vs Drawdown
How to read and use the equity curve and drawdown chart.
The equity and drawdown charts are your two most important visualization tools. Together, they tell the complete story of your strategy's historical performance.
Reading the Equity Curve
The equity curve shows your portfolio value over time. A good strategy produces a curve that trends upward with relatively smooth progression. Look for the overall slope (steeper = better returns), the smoothness (fewer sharp drops = lower risk), and the consistency (steady growth vs. a few big wins).
Reading the Drawdown Chart
The drawdown chart shows how far your portfolio drops from its peak at any point. It always shows zero or negative values. Key things to check: the maximum depth (your worst-case loss), how frequently drawdowns occur, and how long recovery takes.
What to Look For
- Shallow, brief drawdowns followed by new equity highs — a robust strategy
- One very deep drawdown early on — might indicate the strategy wasn't suited for that market phase
- Progressively deeper drawdowns over time — a concerning sign that the strategy may be degrading
- Long flat periods — the strategy isn't losing, but it isn't making money either
Ask yourself: could you psychologically handle the maximum drawdown shown? If a 25% drawdown would cause you to panic, your strategy needs tighter risk management.