DrawdownDD
Drawdown is how far an account or investment has fallen from its previous peak, usually expressed as a percentage.
Every trader and every strategy has losing periods.1 Drawdown measures how deep they go: the fall from the highest point an account has reached to its lowest point since. It matters more than it looks, because losses and the gains needed to recover them are not symmetrical — a 50% loss needs a 100% gain to get back. This entry shows how to measure drawdown, why recovery is so hard, and how risk per trade controls it.
- Category
- Risk Management
- Reading time
- 6 min
- Also called
- Max drawdown, Maximum drawdown, Peak-to-trough decline
- Updated
Drawdown in plain words
If your account grows to $10,000 and then falls to $8,500, you are in a 15% drawdown: you are $1,500 below your last high.2 The drawdown ends only when the account makes a new high.
The maximum drawdown is the deepest such fall over a period. It answers a practical question: how bad did it get, and could you have lived with it?
How to measure and manage drawdown, step by step
Track the running peak
Record the highest account value reached so far (the high-water mark). See High-Water Mark.
Calculate the current drawdown
Drawdown = (peak − current value) ÷ peak. A $10,000 peak and $8,500 now is a 15% drawdown.
Record the maximum
The largest drawdown over the whole history is the maximum drawdown. Also note how long it took to recover — see Drawdown Duration.
Calculate the recovery needed
Gain needed = 1 ÷ (1 − drawdown) − 1. A 15% drawdown needs a 17.6% gain.
Link it to risk per trade
A run of losses at a fixed percentage risk compounds: ten losses at 2% each is an 18.3% drawdown. See Position Sizing.
Set a limit in advance
Decide the drawdown at which you will cut size or stop trading, before you are in it. See Daily and Weekly Loss Limits.
Worked examples
Example 1 — Measuring a drawdown
MeasuringAn account starts at $20,000, grows to $26,000, falls to $19,500, then recovers to $24,000.
| Peak | $26,000 |
| Lowest point after the peak | $19,500 |
| Maximum drawdown | ($26,000 − $19,500) ÷ $26,000 = 25% |
| Current drawdown | ($26,000 − $24,000) ÷ $26,000 ≈ 7.7% |
The account is above where it started, but still 7.7% below its peak. Drawdown is measured from the high, not from the starting balance.
Example 2 — The recovery trap
AsymmetryTwo traders each lose part of a $10,000 account: one loses 20%, the other 50%.
| Trader A: $8,000 left | needs +25% to get back to $10,000 |
| Trader B: $5,000 left | needs +100% to get back to $10,000 |
| Lesson | The deeper the hole, the steeper the climb |
A loss 2.5 times bigger needs a recovery four times bigger. Keeping drawdowns small matters more than finding big winners.
Example 3 — Risk per trade sets the drawdown
SizingTwo traders hit the same streak of 10 losing trades. One risks 1% of the account per trade, the other 5%.
| 1% risk: 1 − 0.99¹⁰ | ≈ 9.6% drawdown → +10.6% to recover |
| 5% risk: 1 − 0.95¹⁰ | ≈ 40.1% drawdown → +67.0% to recover |
| Same trades, same strategy | Very different outcomes |
Losing streaks of ten happen even with decent strategies. Risk per trade, not the strategy, decides whether the account survives them comfortably.
Loss from the peak vs. gain needed to recover
Try it: your drawdown and recovery
Enter your account’s peak and its value now to see the drawdown and the gain needed to recover. Then enter your risk per trade and a losing streak to see how deep that streak would take you. It runs in your browser.
| Current drawdown | −20.0% |
| Gain needed to get back to the peak | +25.0% |
| Drawdown after 10 losses at 2% each | −18.3% |
| Gain needed to recover from that streak | +22.4% |
The streak assumes each loss is the chosen percentage of the account at that moment, so losses shrink as the account does.
Drawdown and the gain needed to recover
| Aspect | Gain needed | What it means in practice |
|---|---|---|
| 10% drawdown | +11.1% | A normal, recoverable dip |
| 20% drawdown | +25% | Several good months of work |
| 30% drawdown | +42.9% | A serious setback |
| 50% drawdown | +100% | You must double what is left |
| 75% drawdown | +300% | Recovery is unlikely for most traders |
Why drawdown matters
Judging a strategy
Two strategies with the same return can have very different drawdowns. The smaller drawdown is usually the more tradable one. See Calmar Ratio.
Choosing risk per trade
Expected losing streaks and the drawdown you can tolerate set a sensible risk per trade. See Risk per Trade.
Staying in the game
Large drawdowns often trigger emotional decisions — doubling size, abandoning a plan — that make things worse. See Trading Psychology.
Funded and prop accounts
Many funded-trader programmes close accounts that exceed a maximum or daily drawdown, so the limit is a hard rule.
Advantages and disadvantages
Advantages
- Shows the pain behind a return figure.
- Easy to calculate from any account or equity curve.
- Links directly to position sizing and survival.
Disadvantages
- Past maximum drawdown is not a limit — future drawdowns can be deeper.
- A single number hides how long the drawdown lasted.
- Backtested drawdowns often understate real ones because of costs and execution.
- Short track records rarely include the worst periods.
Going deeper
Read as far as you need. Each level builds on the one before it.
Drawdown is measured from the peak
Beginner
Profits you have made and then lost count as drawdown. An account that rose from $10,000 to $15,000 and fell back to $12,000 is in a 20% drawdown, even though it is still up overall.
Duration and the underwater curve
Intermediate
Plotting the drawdown at every point in time gives an “underwater” chart: zero at each new high, negative in between. It shows both how deep and how long each drawdown was. A long, shallow drawdown can be harder to sit through than a short, deep one.
Expect a deeper drawdown than your backtest
Advanced
The maximum drawdown in a backtest is one sample from one history. With a different order of the same trades, the worst drawdown could have been much deeper. Simulations that reshuffle the trade sequence (Monte Carlo analysis) are a common way to estimate a more realistic range. See Backtesting.
Common mistakes
Measuring from the starting balance
Drawdown runs from the most recent peak, including profits you gave back.
Raising size to recover faster
Bigger positions during a drawdown make deeper drawdowns more likely. See Loss Chasing.
Trusting the backtest maximum
Real drawdowns are usually larger than the backtest’s worst case.
Ignoring correlated positions
Several positions in the same theme can all lose at once. See Risk Stacking.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Drawdown = (peak − current value) ÷ peak; the maximum drawdown is the deepest one.
- Recovery needs a bigger gain than the loss: 1 ÷ (1 − drawdown) − 1.
- A 50% drawdown needs a 100% gain to get back.
- Risk per trade largely decides how deep a losing streak takes you.
- Plan for deeper drawdowns than your history or backtest shows.
Frequently asked questions
What is a good maximum drawdown?
Does a drawdown end when I am back to my starting balance?
How do I reduce drawdowns?
Further learning
- Position Sizing
The main tool for keeping drawdowns small.
- Stop Loss
Capping each loss is the first line of defence.
- Risk-to-Reward Ratio
How the size of wins and losses shapes an equity curve.
- Leverage
Why borrowed money makes drawdowns deeper and faster.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CME Group. The 2% Rule (opens in a new tab) Checked .
- CME Group. Controlling Risk (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Understanding Drawdown (opens in a new tab)
- Investopedia: Drawdown (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.