An equity curve plots an account's or strategy's net marked value through time. It shows how capital grows, falls and recovers, rather than reducing the result to one final return. In a trading report, the distinction matters: a profitable endpoint can conceal losses that an investor would have had to finance or tolerate along the way.
Here, equity means the owner's net account value, not a portfolio containing only stocks. It includes cash and the marked value of open positions, after account liabilities. Both realised and unrealised profit and loss affect that value. Selling an asset can increase the cash balance without increasing equity: the account has exchanged a position for cash. A chart of cash alone, or of closed-trade profits alone, can therefore hide losses on positions still open.
Read the path, not just the endpoint
Consider a synthetic USD account valued at 16:00 UTC on four successive dates, exactly 24 hours apart. There are no deposits or withdrawals. Any investment income stays in the account; transaction fees, financing charges and management fees are assumed zero, and taxes are excluded. These are illustrative accounting assumptions, not market observations.
| Observation | Equity (USD) | Simple return since previous mark | Running observed peak (USD) |
|---|---|---|---|
| 5 January 2026 | 100 | — | 100 |
| 6 January 2026 | 110 | 10.0000% | 110 |
| 7 January 2026 | 105 | −4.5455% | 110 |
| 8 January 2026 | 113 | 7.6190% | 113 |
For positive beginning equity and no external flows, the period return is
That is the return over the stated three daily intervals, without annualisation. Even adding the exact period returns would give a different result; simple returns compound because each applies to a different beginning equity.
Original synthetic account: filled dots are the observed marks, the dashed line is the running observed peak, and the lower panel shows drawdown as a positive loss magnitude. Connecting lines do not supply unobserved intraday values.
The fall from 110 to 105 is a drawdown of
It uses the previous peak as its denominator. Although equity at 105 is still 5% above the initial 100, it is below the wealth already reached. The maximum drawdown among these observations is therefore 4.5455%, and the final mark of 113 exceeds the earlier peak.
This is an observed maximum drawdown. A daily curve can miss a larger fall and recovery between marks. Monthly observations can conceal still more of the path. Stale or model-based marks may make a curve look smoother than the economic exposure warrants; a marked value also need not equal the proceeds obtainable in an immediate liquidation.
A deposit is not a gain
Suppose a separate account has USD 100 immediately before an external deposit of USD 20. With no price move, income or cost, its equity becomes USD 120. The extra USD 20 is contributed capital; investment profit and investment return at that instant are zero. Treating the balance increase as a 20% trading return would credit the strategy for the owner's deposit.
An account-balance curve answers how much money is in the account. A flow-adjusted wealth index answers how an initial unit of invested capital performed. For a time-weighted return, value the portfolio around external flows, calculate the returns between them and compound those subperiod returns. Simply subtracting total deposits from the final balance does not generally handle their investment timing correctly. The GIPS Handbook's calculation-methodology discussion explains geometric linking and cash-flow adjustments.
What belongs beside the chart
A useful equity curve states its currency, valuation times, treatment of investment income and external flows, and which costs have been deducted. For leveraged or short portfolios, financing and borrow charges can matter alongside transaction costs. Label a gross curve by the costs it excludes, and deduct each included charge once.
For a backtest, also identify the historical sample and the execution assumptions behind the marks. The curve itself cannot show that trades were executable or that information was available at decision time. A smooth rising line is a result to reconcile, not evidence of a reliable trading edge.
The SelfMadeQuant lesson Positions, Trades, Fills and P&L derives the holdings-and-cash ledger behind marked equity, including partial fills and costs. The link opens a public preview; the full lesson requires membership.
Sources
- Elton, Gruber, Brown and Goetzmann, Modern Portfolio Theory and Investment Analysis, ninth edition (Wiley, 2014), Chapter 26, pp. 661–662: returns, external flows and compounded time-weighted performance.
- CFA Institute, GIPS Standards Handbook for Firms, November 2020, discussion of Provision 2.A.24: geometrically linked returns and the treatment of external cash flows.
- Board of Governors of the Federal Reserve System, Regulation T, §220.2 — Definitions: account equity includes security positions and credit balances less debit balances in the US margin-account context. This supports the distinction between net equity and cash, rather than a universal reporting convention for every instrument.