Drawdown

A drawdown is the decline in a trading account caused by an extended series of losing trades. It is measured from the highest account balance (the peak) to the lowest point that follows (the trough) and is usually expressed as a percentage.

Example

A trader starts with $10,000. After a prolonged losing streak, the account has fallen to $8,000. The drawdown is therefore 20% ($2,000 ÷ $10,000 × 100). To bring the account back to the starting capital, the trader now needs a gain of 25%, because the missing $2,000 has to be earned on a smaller base of $8,000 ($2,000 ÷ $8,000 × 100 = 25%).

Why recovery gets harder

The deeper the drawdown, the more sharply the gain required to recover rises:

Why it matters for traders

The largest drawdown in a trading history, the maximum drawdown, is one of the key measures of a strategy's risk and is often considered alongside its returns when assessing performance. Drawdowns are a normal part of trading, but their depth can be limited: consistent risk management with a small risk per trade, smaller positions during losing streaks and a cautious use of leverage all help to keep losses within a range from which an account can recover. Because losing streaks also put traders under psychological pressure, clear money management rules set in advance are especially valuable.