Drawdown and Maximum Drawdown in Trading

What is drawdown

A drawdown is a fall in your account value from its highest point, called the peak, to a lower point that follows it, called the trough. It is usually shown as a percentage of the peak, so you can compare accounts of different sizes.

Drawdown in trading is not the same as a loss on a trade. You can have several losing trades in a row, then a winner, then more losers. The drawdown looks at the whole path. It measures how far your account sits below its last high, whatever mix of trades got it there.

A drawdown ends when the account makes a new high. Until then you are "in drawdown", sometimes called "under water".

Peak-to-trough: how drawdown is measured

To measure a drawdown:

1. Find the highest account value reached so far (the peak).
2. Find the lowest value reached after that peak, before a new high (the trough).
3. Divide the difference by the peak value.

Some details matter for experienced traders:

• Balance vs equity. Balance counts only closed trades. Equity includes the floating profit or loss of open positions. An equity drawdown is usually deeper, because open trades can go far against you before you close them. If you hold losing positions open, a balance-only view hides the real risk.
• Absolute vs relative. Absolute drawdown is the amount of money lost from the peak. Relative drawdown is that amount as a share of the peak. Relative figures are more useful for comparing periods and strategies.
• Deposits and withdrawals. Adding or taking out money changes the balance without any trading. Remove these cash flows before you measure, or your drawdown figures will mislead you.

Maximum drawdown

Maximum drawdown is the largest peak-to-trough fall in a given period or over an account's whole history. It is the deepest hole the account has been in so far.

Traders use maximum drawdown because averages hide pain. A strategy can have a positive average result per trade and still go through a deep, long drawdown that most people would abandon halfway through.

Keep in mind:

• The maximum drawdown in a backtest or a short live record is only the worst case seen so far. A longer sample almost always shows a deeper one.
• A low historical maximum drawdown does not mean the strategy is safe. It may mean the sample was short or the market conditions were unusually kind.

Drawdown duration

Depth is only half of the picture. Drawdown duration is the time from a peak until the account makes a new high. Some traders also track the time from peak to trough and from trough back to the peak separately.

Long durations are hard for most people. Weeks or months without a new high lead to doubt, rule changes and larger positions to "win it back", which often makes the drawdown deeper. Writing down both depth and duration in a trading journal helps you see whether your current drawdown is within what your method has shown before.

Why drawdowns are normal in any method

Every trading method has losing trades. Even a method with a positive trading expectancy (a positive average result per trade over many trades) will produce runs of losses, because the order of wins and losses is largely random over the short term.

This means:

• A drawdown on its own does not prove a method is broken.
• A method with no drawdowns in its record has usually been tested on too little data, or it carries a hidden risk, such as trading without a stop loss, that has not shown up yet. See trading without a stop loss.
• No method guarantees profit. A strategy that worked in the past can stop working, and a drawdown can be the first sign of that. You need both patience and a rule for when to stop and review.

Leveraged forex and CFD trading can lose money fast. Drawdowns in leveraged accounts can be deep within hours, especially around news and market gaps. See trading news risks and gap and weekend risk.

Why deep drawdowns are hard to recover

Losses and gains are not symmetric. After a loss, you have a smaller account, so you need a larger percentage gain just to get back to the peak. The deeper the drawdown, the faster the required gain grows.

Use the calculator below to see the gain needed to recover from a given loss:

The pattern you will see is the main reason risk management focuses on keeping drawdowns shallow. More on this on the drawdown recovery page.

Simulating drawdowns before they happen

A useful way to prepare for drawdowns is to model them. A Monte Carlo simulation takes a set of assumptions, such as win rate, average win compared with average loss, and a fixed risk per trade, and generates many random sequences of trades. Each sequence is a possible path your account could take.

Read the results as a distribution, not a single answer:

• The middle of the range shows a typical path under your assumptions.
• The worse paths show how deep and how long drawdowns can get even when the assumptions hold. These are the ones to plan for.
• The spread between paths shows how much luck alone can change your results over the same number of trades.

The simulator is a model, not a forecast. Real markets have streaks, changing volatility, slippage, gaps and costs that a simple model may not capture, and your real win rate may differ from what you enter. Treat the output as a lower bound on how bad things can get.

What drives drawdown size

The main levers are under your control:

• Risk per trade. The share of the account you risk on each trade has the largest effect on drawdown depth. See how much to risk per trade and position sizing.
• Correlated positions. Several trades on related instruments can act like one large trade. See correlation risk.
• Effective leverage. Total position size compared with equity sets how fast equity moves. See effective leverage and avoiding margin calls.
• Sizing method. Risking a fixed share of equity shrinks position size as the account falls, while a fixed lot does not. See fixed fractional vs fixed lot.
• Stop placement. Stops that are too tight or missing both change the loss pattern. See stop loss placement.

Using drawdown in your risk plan

Practical ways to use drawdown:

• Set a maximum drawdown you are willing to accept before you start, and write down what you will do if you reach it: reduce size, pause, or review the method.
• Add a daily loss limit so a bad day cannot turn into a deep drawdown.
• Compare your live drawdown with your simulated range. If it goes well beyond the worse paths, your assumptions may be wrong.
• Look at risk of ruin to see how risk per trade affects the chance of losing most of the account.

You can put these rules together on the personal risk plan page, and find more background under risk management.

Frequent questions

What is drawdown in simple words?

It is how far your account has fallen from its highest value before it makes a new high. It is usually given as a percentage of that high.

What is the difference between drawdown and maximum drawdown?

Drawdown is any fall from a peak. Maximum drawdown is the largest such fall over a chosen period or the account's full history.

Should I measure drawdown on balance or equity?

Equity gives the more honest picture because it includes open losses. Balance-only figures can look better than the real risk you carried.

Is a drawdown a sign my strategy has failed?

Not on its own. Every method has drawdowns. Compare the current drawdown with your records and simulated range, and have a written rule for when to stop and review.

Can the simulator tell me my future drawdown?

No. It shows a range of outcomes under the assumptions you enter. Real results can be worse because markets do not follow a simple model.

How can I keep drawdowns smaller?

Lower risk per trade, avoid stacking correlated positions, control effective leverage, and use stops and daily loss limits. None of these removes losses, but they limit how deep a drawdown can get.