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Trading strategies that were profitable in the past often degrade with time.Since unlucky streaks can also hit "healthy" strategies, how can one detectthat something truly worrying is happening? It is intuitive that a drawdownthat lasts too long or one that is too deep should lead to a downward revisionof the assumed Sharpe ratio of the strategy. In this note, we give aquantitative answer to this question based on the exact probabilitydistributions for the length and depth of the last drawdown for upward driftingBrownian motions. We also point out that both managers and investors tend tounderestimate the length and depth of drawdowns consistent with the Sharperatio of the underlying strategy.

You are in a drawdown. When should you start worrying?