What is Return/Drawdown Ratio?

At CTI, our Return / Drawdown Benchmark is 3.

Investors use the return/Drawdown Ratio to evaluate the performance of a trading strategy or investment portfolio.

It’s calculated by dividing the total returns (or profits) by the maximum drawdown over a specific period.

Here’s a simple breakdown:

1. Return (or Profit): This is the gain achieved by a trading strategy over a set period. It represents the strategy's positive outcomes.
2. Drawdown: This represents the largest drop from a peak to a trough during a specific period for a trading account. In other words, it indicates the highest loss a trader has experienced before gains start to occur again. A significant drawdown can be an indication of high risk.

For example, a Return of 24% and a Drawdown of 8% would give a Return/Drawdown ratio of 3.

The benefit of this indicator is that the more profit the trader makes, the higher the ratio.

A higher Return/Drawdown Ratio is typically seen as better, indicating that for every unit of risk (drawdown) taken, there’s a higher unit of reward (return).

Conversely, a low ratio can suggest that the returns do not adequately compensate for the risk taken.