Risk management · Intermediate

Understanding Drawdown

Maximum drawdown is the most honest number in any track record, including your own, because it tells you what the bad stretch actually felt like.

Last reviewed 15 September 2026 by the MarketPro research desk · Editorial policy

In short

Drawdown is the percentage decline from an equity peak to the following trough, so an account that falls from 12,000 to 10,200 USD is in a 15% drawdown. Recovery is asymmetric because the gain is earned on a smaller base: 10% down needs +11.1%, 25% down needs +33.3%, and 50% down needs +100%. The curve stays gentle to about 20% and then steepens sharply.

What to remember

Losses and recoveries are not symmetric. Down 50% needs +100% to get back, and down 75% needs +300%.
Drawdown is measured from the equity peak, not from your starting balance, so a profitable account can still be deep in one.
A five-loss streak costs about 5% at 1% risk and over 22% at 5% risk. The streak is the same. Only the sizing differs.
Most accounts are abandoned rather than liquidated, which is why keeping drawdowns shallow is a psychological rule as much as a mathematical one.

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Drawdown is the distance from your best day to now

Drawdown is the decline from an equity peak to the trough that follows it, usually expressed as a percentage. If an account grows to 12,000 USD and then falls to 10,200, that is a 15% drawdown. Maximum drawdown is the deepest such fall on record, and it is the most honest single statistic about any account, any strategy, or any published track record. Returns tell you what happened in the good stretch. Maximum drawdown tells you what the bad stretch felt like, and whether you would have still been there at the end of it.

It is measured from the peak, not from your starting balance, which is why a profitable account can still be in a serious drawdown. The number that matters for your decisions is the one measured against the high-water mark.

The recovery arithmetic is not symmetric

Drawdown	Gain needed to get back to the peak
10%	+11.1%
20%	+25%
25%	+33.3%
50%	+100%
75%	+300%
90%	+900%

The reason is simple. The gain has to be earned on a smaller base than the loss was taken on. Lose half of 10,000 and you have 5,000, and doubling 5,000 is a far harder job than losing half of 10,000 was. The curve is flat and forgiving until roughly 20% and then it bends sharply upward.

Every risk rule that sounds excessively cautious is derived from that curve. Small per-trade risk, daily loss limits, cutting size during a bad run: all of them exist to keep you on the flat part of it. The drawdown calculator lets you put your own equity peak and current balance in and see the recovery requirement.

Drawdowns are not a sign something is broken

Every strategy, including genuinely profitable ones, spends a large share of its life below a previous equity peak. That is not a malfunction, it is what variance looks like from the inside. Losing streaks of five to ten trades happen to every approach eventually, and the fact that they are statistically ordinary does not make them feel ordinary.

What changes the consequences is the size you were using when the streak arrived. A five-loss run at 1% risk is roughly a 5% drawdown, which is a mildly irritating week. The same run at 5% risk is over 22%, which now requires a 29% gain to undo and is deep enough to change how you trade. The streak was identical. Only the sizing differed, which is the same point the position size calculator exists to make concrete.

There is a related trap in how drawdown is reported. A percentage measured on closed trades only, ignoring open losing positions, understates the real decline, sometimes badly. Equity drawdown, which includes floating losses, is the honest version. Any record that quotes balance drawdown while holding large losing positions is describing a different and friendlier account than the one that exists.

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The part that is not arithmetic

Most accounts are not liquidated. They are abandoned. A trader 40% down usually stops before the market finishes the job, because sitting in a deep drawdown while executing the same plan is psychologically brutal, and every trade taken from there carries the weight of the hole. Keeping drawdowns shallow is not only about the recovery percentage, it is about remaining willing to take the next valid setup at normal size.

This is also why the instinctive response to a drawdown is the wrong one. Increasing risk to recover faster is how a 20% drawdown becomes a 60% one, because the larger size applies to the losses as well as the wins, and you are deploying it exactly when your judgement is most compromised.

Rules that keep drawdowns survivable

Decide your personal maximum in advance. Pick a figure, 15% is a common choice, at which you stop opening new positions, review the journal, and return at half size. Decide it while you are calm, because you will not decide it well at 14%.
Cut size on the way down, not on the way up. Fixed-fractional sizing does some of this automatically, since 1% of a smaller account is less money. A deliberate halving does the rest.
Separate process from outcome. Review whether the trades followed the plan. A drawdown made of well-executed trades is variance; a drawdown made of rule breaks is a different problem with a different fix.
Read any track record drawdown-first. When you assess a strategy, a signal service or your own backtest, look at the worst drawdown before you look at the return. A return you could not have sat through is not a return you would have earned.
Track duration as well as depth. A 12% drawdown that lasts four months is harder to trade through than a 20% one that resolves in a fortnight, because the pressure to change something compounds with time. Record both the depth and the number of days spent below the peak.

It is also worth separating the two ways a drawdown deepens. One is a run of ordinary losses at normal size, which is variance and requires patience. The other is a small number of outsized losses, which is a sizing or discipline failure and requires a change. They look similar on an equity curve and call for opposite responses, and only the trade-by-trade record tells them apart.

Past performance is not indicative of future results, and the deepest drawdown in any record is very unlikely to be the deepest one that will ever happen. Plan for worse than you have seen, and the arithmetic stays on the flat part of the curve.

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Written and reviewed by the MarketPro research desk

MarketPro is a trading-signal and trading-education app operated by Harajuku Holdings LTD (Cyprus). Our signal desk publishes and tracks every trade idea in-app, and every page here is checked against the app's live behaviour before publishing. Last reviewed 15 September 2026. How we produce signals and content · About MarketPro

FAQ

Understanding Drawdown: questions

What is a maximum drawdown?

Maximum drawdown is the largest peak-to-trough decline an account or strategy has recorded, expressed as a percentage of the peak. It answers the question of how bad the worst stretch was, which returns alone never show. When assessing any track record, including your own backtest, read the maximum drawdown before you read the return.

How much gain do I need to recover a 50% loss?

A 100% gain, because the gain has to be earned on the reduced balance. Losing half of 10,000 USD leaves 5,000, and getting back to 10,000 from there means doubling. The relationship accelerates as the hole deepens: 75% down requires a 300% gain and 90% down requires 900%.

Should I increase my position size to recover from a drawdown faster?

No, and it is the most reliable way to turn a recoverable drawdown into a terminal one. Larger size applies to losses as well as wins, and you would be deploying it at the moment your judgement is most affected by the losses already taken. The conventional response is the opposite: reduce size, return to the process, and accept that recovery takes longer than the loss did.

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