Drawdown meaning: what is drawdown in trading?
Drawdown is how far an account or investment has fallen from its highest value to a later low, usually shown as a percentage of that peak.
In general English, a drawdown is a reduction: water drawn down from a reservoir, or, in UK pensions, taking an income straight from a pension pot. In trading, drawdown is the fall in an account from its highest point to its lowest point before a new high. If an account grows to $12,000 and then drops to $9,000, the drawdown is $3,000, or 25% of the peak. The deepest such fall over a period is the maximum drawdown. Drawdowns matter because losses and gains are not symmetrical: getting back from a 25% drawdown takes a 33% gain, and from 50% it takes 100%.
Key takeaways
- Measured from the peak, not from the deposit. Giving back profits counts as drawdown.
- Recovery is lopsided: a 50% drawdown needs a 100% gain to get back to the peak.
- Risk per trade sets the drawdown you live through. Ten losses at 1% cost about 10%; at 5% they cost about 40%.
What drawdown means in trading
A drawdown is any stretch where an account is below its previous high. It starts the moment the account turns down from a peak and ends when the account makes a new peak. Within it, the lowest point is the trough, and the distance from peak to trough is the size of the drawdown.
Two details catch people out. First, drawdown is measured from the highest value the account reached, not from what you deposited. An account that grew from $10,000 to $12,000 and fell back to $10,500 has not lost money overall, but it is in a 12.5% drawdown. Second, it is usually measured on equity, including open trades, because a position that is $2,000 down is a real loss even before it is closed.
You will see a few related terms. Maximum drawdown is the largest peak-to-trough fall over the whole record. Drawdown duration is how long the account took to get back to its old high, which can be months. Absolute drawdown, on some platforms, means how far the account fell below the starting deposit.
How to calculate drawdown
The formula is short: drawdown = (peak - trough) / peak x 100.
With the account in the chart: the peak is $12,000 and the trough is $9,000. ($12,000 - $9,000) / $12,000 = 0.25, a 25% drawdown. Note that the same $3,000 would be only 15% from a $20,000 peak; the percentage is what lets you compare accounts of different sizes.
When you review a strategy or a trading record, look at the maximum drawdown alongside the length of the longest losing streak. Together they tell you what following the plan would have felt like, which matters as much as the end result. The drawdown calculator works out both the drawdown and the gain needed to recover from it.
Why recovering from a drawdown is harder than falling into it
A loss and the gain that undoes it are not the same percentage, because the gain is earned on a smaller balance. Lose 50% of $10,000 and you have $5,000; to get back to $10,000 you need to make $5,000 on $5,000, which is 100%.
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Small drawdowns are cheap to recover from; deep ones become almost impossible. The general formula is gain needed = drawdown / (1 - drawdown). This is the arithmetic behind every rule about keeping risk small: the aim is not to avoid drawdowns, which every trader has, but to keep them in the top rows of this table.
What controls the size of your drawdowns
The biggest lever is the share of the account you risk on each trade. Losing streaks happen to every approach, and the drawdown a streak causes depends almost entirely on that share. Here is what ten losing trades in a row would do, with each loss taken from the shrinking balance:
| Risk per trade | After 10 straight losses |
|---|---|
| 1% | About 9.6% drawdown |
| 2% | About 18.3% drawdown |
| 5% | About 40.1% drawdown |
At 1% a bad run is uncomfortable; at 5% it is a 40% hole that needs a 67% gain to fill. Other habits help too: counting correlated positions as one risk, setting a daily or weekly loss limit, and reducing size during a drawdown rather than increasing it to win the money back. The position size calculator turns a fixed risk into a lot size, and the risk management guide covers the rest.
Frequently asked questions
What is a good maximum drawdown?
How do you calculate drawdown?
Is drawdown the same as a loss?
What does drawdown mean for a pension?
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Not investment advice. Past performance is not indicative of future results.