What is drawdown in trading?
Every account spends most of its life below its own record high. The distance from that high to the low that follows is drawdown, and it is the number that decides whether you are still trading next year — not because of the money it removes, but because of the gain it demands before you are whole again.
How is drawdown measured?
Take the highest equity your account has reached, then the lowest point after it, before a new high is made. Drawdown = (peak − trough) ÷ peak. An account that grew from $5,000 to $6,000 and then fell to $4,500 has a drawdown of ($6,000 − $4,500) ÷ $6,000 = 25% — even though it is only 10% below where it started. Maximum drawdown is the worst such fall in the whole record; it is the first number a professional asks about a strategy, before the return.
Why is recovery so much harder than the loss?
Because the gain is measured on a smaller base. Lose 20% of $5,000 and you have $4,000; to get back to $5,000 you need $1,000, which is 25% of $4,000. The deeper the hole, the faster the required gain grows — and it grows without limit.
| Drawdown | Gain needed to recover | On a $5,000 account |
|---|---|---|
| 10% | 11.1% | $4,500 → needs +$500 |
| 20% | 25.0% | $4,000 → needs +$1,000 |
| 30% | 42.9% | $3,500 → needs +$1,500 |
| 50% | 100.0% | $2,500 → needs +$2,500 |
| 70% | 233.3% | $1,500 → needs +$3,500 |
| 90% | 900.0% | $500 → needs +$4,500 |
Gain needed = drawdown ÷ (1 − drawdown). The dollar amount is the same both ways; the percentage is not, and percentages are what your method produces.
How much drawdown should a beginner allow?
Set limits in advance, in writing, at three levels: per trade, per day, per month. A common professional frame is 1% risk per trade, a daily stop of 3% and a monthly stop of 10% — hit the monthly line and you stop trading, review the journal and restart only when you can name what changed.
Risk per trade is what keeps the curve flat. Ten straight losses at 1% risk leave 0.9910 = 90.4% of the account: a 9.6% drawdown, recoverable with an 10.6% gain. The same ten losses at 5% risk leave 0.9510 = 59.9%: a 40.1% drawdown that needs +67% to undo. Ten-loss streaks happen to good systems; the sizing decides whether one is a bruise or a funeral.
When is drawdown not a problem?
When it is inside the range the method was expected to produce. Every strategy with a 40% win rate will, over a few hundred trades, hit a streak of eight or nine losses; a backtest that never showed a 15% drawdown was too short, not too good. The question to ask is not "am I in drawdown?" — you usually are — but "is this drawdown larger than the worst the system has ever produced?" If yes, something has changed and the honest response is to cut size and investigate, not to trade harder to get it back.
FAQ
What is a good maximum drawdown? There is no universal number; what matters is that it stays inside what your method historically produced and inside what you can psychologically hold. Many professionals treat a 20% maximum drawdown as the line where a strategy is paused and reviewed.
Does drawdown include open positions? Usually yes — it is measured on total equity, including unrealised profit and loss. A method that looks calm on closed trades but shows deep open drawdowns is hiding its risk.
How do I reduce drawdown? Risk less per trade (1% instead of 5% turns a 40% drawdown into a 10% one over the same losing streak), stop trading at a written daily and monthly loss limit, and avoid correlated positions that lose together.
See what your own losing streak would do
Enter your risk per trade and a streak length; the tool shows the drawdown and the gain needed to recover.
Every key term, one roadmap
The whole slide course — ten free PDF parts, 328 pages.
Drawdown is the reason position sizing comes before strategy in the Primer Path. Position sizing caps each loss, the risk-of-ruin simulator shows how often a given sizing blows up, and Lesson 2 explains why oversized positions, not bad predictions, produce most first-year drawdowns.