How to Read RangeSight's Drawdown Curves

What the Drawdown Curve Shows

The drawdown curve is a visualization of the worst-case decline from peak equity across all simulated paths. Unlike an equity curve that shows growth, the drawdown curve shows pain — the deepest trough your account reaches before recovering to a new high. Research by Magdon-Ismail & Atiya (*The Annals of Applied Probability*, 2004) demonstrated that the expected maximum drawdown grows with the square root of the number of trades, making this visualization essential for realistic risk assessment.

Understanding Percentile Bands

RangeSight displays three key percentile bands:

• P5 (worst case): Only 5% of simulations performed worse than this. If this line hits your ruin threshold, you have a significant risk problem.
• P50 (median): The typical drawdown experience. Half of simulations were better, half worse. This is your most realistic expectation.
• P95 (best case): Only 5% of simulations performed better. This is the optimistic scenario you should not plan around.

What to Look For

1. P5 depth: If P5 drawdown exceeds 40–50%, your position size is likely too aggressive. According to AQR Capital Management research (2019), strategies with P5 drawdowns exceeding 40% have a less than 30% probability of surviving two years of live trading.

2. P50 recovery time: How long does the median path take to recover from its worst drawdown? Recovery times exceeding 6 months indicate high variance strategies.

3. P5 vs P50 spread: A wide spread (>20 percentage points) means high variance. Your outcomes are unpredictable and position sizing must be conservative.

Making Decisions

Use the drawdown curve to find the risk level where:

• P5 stays within your psychological tolerance
• P50 shows manageable, recoverable drawdowns
• The strategy still produces meaningful returns at P95

Learn more about drawdown math in our trading risk blog.