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Underwater Curve (Drawdown)

What it is​

The Underwater Curve (also called the drawdown chart) plots the percentage decline from the equity peak at every point in time. When the strategy hits a new equity high, the curve touches zero. When the strategy loses from its peak, the curve dips below zero — and stays there until a new high is reached. The depth and duration of these dips reveal the strategy's risk profile in a way that the equity curve alone doesn't show.

Underwater curve showing drawdown below zero over time

A smooth equity curve can hide meaningful drawdowns. The underwater curve makes every drawdown explicit — how deep, how long, and how frequently they occur.

How to access it​

Navigate to the Underwater tab in the performance dashboard. Available on Plus and above.

What you see​

  • X-axis — Calendar date (the date axis spans the full backtest period).
  • Y-axis — Drawdown percentage from peak (always zero or negative).
  • Area chart — The space between zero and the drawdown line is filled, creating a visual representation of "being underwater."
  • The area fill is rendered in red, with a bright pink/red line tracing the drawdown curve.
  • Depth markers — The maximum drawdown point is typically highlighted.

The chart always starts at zero and returns to zero each time a new equity high is reached. The area below zero represents capital at risk relative to the previous peak.

How to interpret it​

Drawdown depth​

  • Max drawdown < 2% — Very conservative. Low-risk strategy with tight control.
  • Max drawdown 2–5% — Moderate. Typical for well-managed intraday strategies.
  • Max drawdown 5–10% — Significant. Acceptable for some strategy types but requires strong recovery evidence.
  • Max drawdown > 10% — High risk. Evaluate whether the return justifies this level of risk exposure.

Drawdown duration​

Depth alone doesn't tell the full story. A 3% drawdown that recovers in 5 trades is very different from a 3% drawdown that takes 80 trades to recover:

  • Quick recovery (< 20 trades) — The strategy handles adverse periods well and bounces back. Drawdowns are uncomfortable but temporary.
  • Extended recovery (20–50 trades) — Moderate. The strategy goes through meaningful periods of underperformance before recovering.
  • Very long recovery (50+ trades) — The strategy may have entered a regime where its edge is reduced. Consider whether the edge is genuinely recovering or just slowly reverting to the mean.

Drawdown patterns​

Shallow, frequent dips: Many small drawdowns with quick recoveries. This is characteristic of high-win-rate strategies. Psychologically easy to trade, low tail risk.

Rare but deep dips: Infrequent drawdowns, but when they happen, they're substantial. Characteristic of trend-following strategies — long periods of steady gains interrupted by sharp corrections. Psychologically harder to trade.

Progressively deepening dips: Each successive drawdown is deeper than the last. Warning sign — the strategy's risk is increasing over time, possibly due to regime change or position sizing issues.

Single dominant drawdown: One major drawdown dwarfs all others. Check whether this corresponds to an extraordinary market event (news shock, flash crash) or a genuine strategy failure.

Setting drawdown limits​

Use the WFO maximum OOS drawdown as your benchmark. If your live drawdown exceeds 2× the maximum OOS drawdown observed in walk-forward analysis, it exceeds the validated risk envelope and warrants pausing the strategy.

Example​

Underwater curve for 200 trades on a DEMA/EMA crossover on EURCHF:

  • Maximum drawdown: −1.8% at trade 95 (during the low-volatility period).
  • Recovery: 15 trades (from trade 95 to trade 110 to reach a new equity high).
  • Typical drawdowns: −0.3% to −0.8%, recovering within 5–10 trades.
  • WFO max OOS drawdown: −1.2%. The live max of −1.8% exceeds this but is within the 2× threshold (2.4%).

Interpretation: The drawdown profile is consistent with expectations. The worst drawdown lasted only 15 trades and never approached the 2× WFO threshold. The regular small drawdowns (−0.3% to −0.8%) are typical of a high-win-rate crossover strategy and recover quickly. No progressive deepening or extended recovery periods.