While it’s natural to expect an equity curve (the graphical representation of your account balance over time) to slope upwards, the reality of trading is much more complex. An equity curve is not guaranteed to always slope upwards, even for profitable traders. Short-term fluctuations, drawdowns, and periods of negative performance are inevitable in trading, and these can lead to temporary downward movements in the equity curve. However, what matters most is the overall trajectory of the equity curve over time. As long as the equity curve shows consistent long-term growth despite temporary dips or fluctuations, the trader is on the right path.

Why some believe the equity curve must always slope upwards

1. Desire for consistent profitability
Traders naturally associate upward-moving equity curves with consistent, smooth profits. A trader might feel that the ideal outcome is one where the curve shows steady, uninterrupted growth, with no dips or downtrends. A consistently rising equity curve is often seen as a sign of a flawless strategy or a perfect trading approach.

2. Positive reinforcement and motivation
A steadily upward-sloping equity curve provides positive reinforcement for traders, as it visually represents their growing success. It can be highly motivating to see that profits are continually increasing over time, which reinforces the belief that their strategy is working well.

3. Lack of understanding of market cycles
Some traders might expect their equity curve to always go up because they don’t fully understand market cycles and the inherent volatility of trading. Markets are dynamic, and temporary losses, drawdowns, and volatile periods are part of the trading process. Traders who don’t anticipate these fluctuations may expect an equity curve to always increase.

Why an equity curve doesn’t always slope upwards

1. Drawdowns are part of the trading process
Drawdowns (temporary declines in account balance) are a natural part of trading, even for highly successful traders. No trading strategy can produce profits every single month, and it’s inevitable to experience periods of negative performance. During these times, the equity curve will move downward, but this doesn’t necessarily mean that the strategy is failing. What matters is the ability to recover from drawdowns and continue growing the account over time.

• Example: A trader who experiences a 10% drawdown may need a 12% gain to get back to break-even. Drawdowns are a normal aspect of trading, and an equity curve may temporarily slope downward during these periods.

2. Market conditions can cause volatility in the equity curve
Markets don’t move in straight lines; they are volatile and can experience sharp movements in both directions. External events, economic data releases, or market sentiment changes can lead to brief periods of losses or flat performance. Even the most successful strategies can go through phases where the equity curve flattens or dips before resuming an upward trend.

3. Risk management creates natural fluctuations
Proper risk management often involves taking smaller, calculated risks to protect capital. As a result, a strategy that limits risk may experience periods of flat or negative performance while it waits for more favorable market conditions. These periods of low or no growth can lead to temporary dips in the equity curve, even if the strategy is ultimately profitable in the long run.

4. Emotional factors can impact trading
Trading involves both logical and emotional decisions, and during periods of losses or drawdowns, traders may become more emotional or react impulsively. This can lead to errors in judgment, such as increasing position sizes to recover losses quickly, which can result in larger drawdowns or account blow-ups. Emotional trading can lead to a temporary downward slope in the equity curve. Mental discipline and emotional control are required to ensure that these fluctuations don’t cause traders to abandon their strategies or make reckless decisions.

5. Strategies don’t always produce smooth upward growth
In reality, trading strategies often experience volatility in performance, even if they are profitable over the long term. Some strategies might have periods of consistent profits followed by drawdowns, while others may be more cyclical in nature. A strategy may show positive growth over time but will have natural fluctuations. The key is that the long-term trend should be upward, even if there are periods of losses along the way.

What matters in evaluating an equity curve

Instead of expecting the equity curve to always slope upwards, traders should focus on the long-term trajectory and the overall risk-reward balance of their strategy. Here are some important factors to consider when evaluating an equity curve:

1. Long-term growth
The most important aspect of an equity curve is whether it shows consistent long-term growth. The curve may dip at times, but the overall trend should be upward. As long as the equity curve shows growth over time, and the strategy is profitable in the long run, the trader is on the right path.

2. Drawdown management
It’s important to track drawdowns and understand how long it typically takes to recover from them. Short-term dips are inevitable, but the ability to recover quickly and continue achieving long-term growth is a sign of a solid trading strategy. The depth and duration of drawdowns should be monitored to ensure they are within acceptable limits.

3. Volatility of the equity curve
While a perfectly smooth equity curve is rare, it’s important to understand the volatility of the curve. A high level of volatility may indicate too much risk or an unreliable strategy, while a relatively smooth upward slope with controlled drawdowns reflects a more stable and sustainable approach. Traders should aim for an equity curve with manageable volatility that reflects a balanced approach to risk and reward.

4. Consistency of returns
Consistency is key to long-term trading success. Look at the consistency of returns over various periods (monthly, quarterly, or annually), not just at individual monthly profits. A strategy that produces consistent returns with manageable drawdowns over time is generally more reliable than one that produces large profits followed by big losses.

5. Risk-adjusted returns
Assessing the risk-adjusted returns of your strategy (using metrics like the Sharpe ratio or Sortino ratio) helps you understand whether the returns justify the risks you are taking. Focusing on risk-adjusted returns ensures that your equity curve reflects not just profitability, but also how well you’re managing risk to achieve that profit.

Conclusion: Must an equity curve always slope upwards?

No — an equity curve does not always have to slope upwards in the short term. Drawdowns, volatility, and fluctuations are natural in trading, and they do not automatically mean failure. What matters is the long-term trajectory of the equity curve, showing consistent growth over time, despite temporary dips. Managing risk, controlling drawdowns, and maintaining psychological resilience are essential for achieving sustainable profitability in trading.

Learn how to develop consistent, profitable strategies, manage drawdowns, and navigate market volatility through our expert-led Trading Courses, designed to help you achieve long-term success in the markets.