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Risk & money management

Drawdown

Drawdown is the decline in an account or strategy from its highest value to a subsequent low, usually expressed as a percentage of that peak.

Also called: Max drawdown · Peak-to-trough decline · MDD

Drawdown describes how far an account has fallen from its most recent high. It captures the pain of a losing streak in one number and is one of the most useful ways to compare the risk of two strategies that show similar returns. A drawdown lasts until the account makes a new high.

How it’s calculated

Drawdown (%) = (peak value − trough value) ÷ peak value × 100

Maximum drawdown is the largest such decline over the period studied. The gain needed to recover is:

Recovery gain (%) = drawdown ÷ (1 − drawdown)

So a 10% drawdown needs about 11.1% to recover, 25% needs 33.3%, and 50% needs 100%. The relationship is not linear, which is why limiting deep drawdowns matters more than chasing big wins.

Example

An account grows from $10,000 to a peak of $12,000. A losing streak then takes it down to $9,600 before it starts to climb again.

  • Drawdown = (12,000 − 9,600) ÷ 12,000 = 20%
  • Gain needed to get back to $12,000 = 2,400 ÷ 9,600 = 25%

If that trader had risked 1% of equity per trade, reaching −20% would take a long run of consecutive losses. Risking 5% per trade, it could take only four or five losses in a row. That is the link between drawdown and position size.

Common mistakes

  • Risking a fixed large percentage. Big per-trade risk turns ordinary losing streaks into deep drawdowns. The position size calculator keeps each loss to a set share of the account.
  • Ignoring open losses. A position held far below entry is already a drawdown, even if it is not closed.
  • Adding leverage to recover faster. Increasing size after losses accelerates the drawdown more often than it repairs it.
  • Judging a strategy by returns alone. Two systems with the same profit can have very different worst stretches; compare drawdown and expectancy together.
  • Not recording it. A journal makes drawdowns visible early; see trading journal mistakes.

In SnapPulse

SnapPulse calculates position size on the device from your balance, your risk percentage and the stop distance, which helps keep each loss, and therefore drawdowns, within the limit you set. Download SnapPulse.

Educational content — not financial advice.

Updated

Frequently asked questions

What is maximum drawdown?

Maximum drawdown is the largest peak-to-trough decline recorded over a given period. It is a common measure of the worst losing stretch a strategy or account has gone through.

Why is recovering from a drawdown hard?

Because the gain needed is calculated on a smaller balance. A 20% drawdown needs a 25% gain to recover, and a 50% drawdown needs a 100% gain.

Is drawdown the same as a loss?

Not exactly. A drawdown measures the decline from the latest peak, which may include open losses and several trades, while a loss usually refers to a single closed trade.