From the peak down to the low:drawdown is how far you go.
The decline from a peak to a trough in account equity, usually expressed as a percentage.
Maximum drawdown is a key metric for evaluating trading strategy risk.
In plain words
Drawdown is how far an account has fallen from its highest point, usually given as a percentage of that peak. Maximum drawdown is the largest such fall over a period.
gain required to recover = loss ÷ (1 − loss)
See it move
Drawdown: the distance between Peak equity and Lowest equity
Why it matters
Drawdown shows the worst stretch an account or a strategy went through, which an average return hides. The deeper the fall, the larger the percentage gain needed to return to the peak, because the gain is earned on a smaller sum.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An account peaks at 10,000 and falls to 8,000 (invented figures).
- 1Drawdown = (10,000 − 8,000) ÷ 10,000 = 20%
- 2Gain needed = 2,000 ÷ 8,000 = 25%
- 3By the formula0.20 ÷ (1 − 0.20) = 0.25
A drawdown of 20% needs a gain of 25% to recover; a drawdown of 50% would need 100%.
A common mistake
It is natural to assume a 20% loss is undone by a 20% gain. Here 20% of 8,000 is 1,600, which leaves the account at 9,600.
Check yourself
Learn more
- Academy lessonPosition sizingLot sizes, the percent-risk model, fixed-fractional sizing and the Kelly criterion, with the formulae and a worked example.
- Academy lessonTesting a set of rulesFour steps with this site’s own tools: describe a rule, test it on invented prices, see what position size does, and record real decisions. And what such a test cannot show.
- GuideFive risk management rules for leveraged tradingRisk per trade, stop placement, the reward-to-risk arithmetic, correlated exposure and a written plan: five habits that limit how much a single mistake can cost.
- GuidePosition sizing: the arithmetic of risk per tradeFixed percentage, fixed amount, Kelly and volatility-based sizing, with the formula and a worked example for each.
Educational information, not investment advice or a recommendation to trade.