Definition
DrawdownDrawdown is the decline in an account or strategy from a peak value to a subsequent low, usually expressed as a percentage of that peak.
Example
If an account grows to $12,000 and then falls to $9,600 before making a new high, the maximum drawdown is $2,400, or 20% of the $12,000 peak.
In detail
Drawdown measures how far your account has fallen from its highest point. It is calculated as:
Drawdown % = (peak value − trough value) ÷ peak value × 100
Traders distinguish between a few versions:
- Current drawdown: how far the account is below its all-time high right now.
- Maximum drawdown: the largest peak-to-trough fall over a period, often used to compare strategies.
- Floating drawdown: the unrealized loss on open positions, visible as the gap between equity and balance.
Why recovery is harder than the loss
Losses and gains are not symmetrical. After a drawdown, you need a larger percentage gain to get back to the peak:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
The formula is: required gain = drawdown ÷ (1 − drawdown). A 50% loss turns $10,000 into $5,000, and $5,000 must double to return to $10,000.
Example
Suppose (illustratively) a trader risks 2% of the current balance on each trade and suffers 8 losses in a row. The balance after the streak is 0.98 to the power of 8, or about 85.1% of the starting value, a drawdown of roughly 14.9%. If the same trader risked 5% per trade, eight losses would leave 0.95 to the power of 8, or about 66.3%, a drawdown of roughly 33.7%.
Losing streaks like this happen even with reasonable strategies, which is why the size of each risk matters so much.
Why it matters
Drawdown is one of the most practical ways to judge risk. A strategy that produced a high return with a 60% drawdown along the way may be impossible to follow in real life, both financially and emotionally. Keeping per-trade risk small, using a stop-loss, and logging results in a Trading Journal all help keep drawdowns within limits you can tolerate.
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Related terms
- EquityEquity is the real-time value of a trading account: the balance plus or minus the unrealized profit or loss on all open positions.
- Risk ManagementRisk management is the set of rules a trader uses to limit losses, such as capping risk per trade, using stop-losses and controlling total exposure.
- Margin CallA margin call is a broker warning that your account equity has fallen too low relative to the margin your open positions require.
- Stop-LossA stop-loss is an order that closes a trade automatically at a preset price to cap the loss if the market moves against you.