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Time to recovery

How long it takes to regain a prior equity peak, which grows quickly with drawdown depth because the required gain grows faster.

Estimate it directly: required gain is 1 / (1 - drawdown) - 1, and recovery time is roughly that divided by the strategy's periodic return. A 25% drawdown needs 33.3%; in a strategy compounding 1.2% a month, that is about 24 months of uninterrupted performance.

Two adjustments make the estimate honest. First, if a drawdown-throttle cuts size during the decline, recovery runs slower than the raw figure - possibly half as fast. Second, the strategy must still work; the environment that produced the drawdown does not politely end at the trough.

The output of this calculation is usually a decision about limits. Most traders, when they see that a 35% drawdown implies a three-year recovery, tighten their loss limits rather than accept the number. See drawdown-recovery-maths.

Related: drawdown-recovery-maths, drawdown-duration, drawdown-throttle, monthly-loss-limit

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

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