The peak-to-trough decline in account equity over a trading period, expressed in percent.
Drawdown measures the extent of decline from an equity peak to the subsequent trough before a new peak is reached. A 20% maximum drawdown means the account fell 20% from its highest recorded equity level before recovering. It is arguably the most honest single statistic for evaluating a strategy or fund manager, because it captures the worst real-world experience of a trader running that strategy - more informative than average return or win rate in isolation.
Two related metrics are worth distinguishing: maximum drawdown (the worst historical peak-to-trough loss) and current drawdown (the decline from the most recent equity peak). Professional risk management frameworks almost universally impose hard drawdown limits: proprietary trading firms typically enforce a 5–10% daily drawdown limit and a 10–15% maximum total drawdown, after which the trader is suspended from trading. PAMM and MAM fund managers are similarly evaluated against drawdown tolerance thresholds by their investors.
Drawdown size is directly connected to leverage and position sizing. A trader using 10% of capital per trade faces compounding drawdown quickly if a losing streak materialises; a trader risking 0.5–1% per trade can sustain a run of 20 consecutive losses before hitting a 10% drawdown. Recovery mathematics compound the problem: recovering a 20% drawdown requires a 25% gain on the remaining capital; recovering a 50% drawdown requires a 100% gain. Keeping maximum drawdown bounded is therefore more important than maximising returns during favourable periods.
Worked Example
Account peaks at $15,000. A losing streak drops equity to $11,250 - a $3,750 decline, or a 25% maximum drawdown. To recover back to the $15,000 peak from $11,250 requires a 33% gain ($11,250 × 1.333 = $15,000). At 1% risk per trade this is recoverable; at 5% risk per trade a similar streak produces a 46% drawdown requiring an 85% gain to recover.
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