Drawdown percentiles tell you how often your strategy experiences drawdowns of different sizes. Instead of just knowing the worst drawdown, you understand the full distribution of all drawdowns throughout your backtest.
The Three Key Percentiles
| Percentile | What It Means | Use Case |
|---|---|---|
| 50th (Median) | Half of all drawdowns are smaller than this | Your "typical" drawdown experience |
| 90th | 90% of drawdowns are smaller than this | What to expect in bad periods |
| 95th | 95% of drawdowns are smaller than this | Close to the worst case scenario |
Why Maximum Drawdown Is Not Enough
Most traders only look at maximum drawdown. This is misleading:
| Metric | Strategy A | Strategy B |
|---|---|---|
| Max Drawdown | 15% | 15% |
| Median Drawdown | 2% | 8% |
| 90th Percentile DD | 6% | 13% |
Both have the same max drawdown, but Strategy A is much easier to trade. Strategy B constantly sits in drawdowns close to the maximum, while Strategy A rarely sees large drawdowns.
How to Use Drawdown Percentiles
1. Set Position Size
Use the 90th percentile, not max drawdown, for position sizing:
If 90th percentile DD = 8% You can tolerate max 20% portfolio drawdown Position size = 20% / 8% = 2.5x leverage or full capital allocated
2. Prepare Mentally
Know what to expect:
- Median DD = 3%: You'll see this level all the time, get comfortable with it
- 90th DD = 10%: Will happen occasionally, don't panic
- 95th DD = 14%: Rare but possible, have a plan
- Max DD = 18%: Probably won't see this again, but could
3. Define Exit Rules
Create systematic rules based on percentiles:
- At median DD: Normal, no action
- At 90th percentile DD: Review strategy, check if market conditions changed
- Beyond 95th percentile DD: Reduce position size by 50%
- New max DD exceeded by 20%: Stop trading, strategy likely broken
The Underwater Plot
The underwater plot shows drawdown over time. Look for these patterns:
| Pattern | What It Means | Action |
|---|---|---|
| Quick recovery spikes | Strategy recovers fast from losses | Good sign, easier to trade |
| Long flat periods underwater | Extended drawdown periods | Prepare for capital being tied up |
| Gradually deepening valleys | Losses accumulate slowly | May not notice until it's too late |
| Sudden deep drops | Flash crash risk or fat tail events | Add risk controls, use stop losses |
Real-World Example
Strategy with these drawdown percentiles:
- Median: 2.5%
- 90th: 7.2%
- 95th: 9.8%
- Max: 12.4%
Interpretation:
- You'll typically experience 2.5% drawdowns (happens constantly)
- About once per 10 drawdown periods, you'll see 7%+ losses
- Anything beyond 10% is rare and worth investigating
- If live trading goes to 15% drawdown, strategy is performing worse than backtest
Distribution Shape Matters
The relationship between percentiles tells you about drawdown distribution:
Scenario 1: Tight Distribution
Median: 3% | 90th: 5% | 95th: 6% | Max: 7% Consistent small drawdowns, predictable
Scenario 2: Wide Distribution
Median: 2% | 90th: 8% | 95th: 15% | Max: 22% Mostly small drawdowns, occasional disasters
Strategy in Scenario 2 has fat tails. Most of the time it's fine, but when it goes wrong, it goes very wrong.
Common Mistakes
- Only looking at max DD: Ignores how often you experience different drawdown sizes
- Not tracking recovery time: A 10% DD that recovers in 1 week is very different from one that takes 6 months
- Comparing strategies on max DD alone: Use the full distribution to compare
- Setting stop losses at max DD: You'll hit your stop in live trading. Use 95th percentile instead
How VivaTrades Calculates This
For every point in your equity curve:
- Calculate how far below the peak you are at that moment
- Convert to percentage: (Current Equity - Peak Equity) / Peak Equity
- Sort all these drawdown percentages
- Extract the 50th, 90th, and 95th percentiles
This gives you the complete picture of your strategy's downside risk.
In VivaTrades
View drawdown percentiles in the Risk Analysis tab. VivaTrades shows median, 90th, and 95th percentile drawdowns along with the underwater plot to help you understand your strategy's typical drawdown behavior.