Drawdown
Risk Management
Drawdown is the peak-to-trough decline in an account's value, a key measure of how much capital a strategy puts at risk before recovering.
What is drawdown?
Drawdown measures how much an account’s value has fallen from its most recent high point, usually expressed as a percentage. It captures the reality that no trading strategy wins every trade in a row — equity rises and falls, and drawdown is simply the size of the dips along the way, before a new high is eventually reached again.
Drawdown is different from a single losing trade: it can build up gradually over a string of small losses, or come from one large one, and it keeps growing until the account recovers back above its previous peak.
A worked example
Suppose an account grows from $10,000 to a peak of $12,000. It then goes through a losing streak and falls to $9,600 before turning back up. The drawdown is calculated from the peak, not the starting balance: ($12,000 − $9,600) ÷ $12,000 = 20% drawdown.
That 20% figure matters more than it might first appear, because recovering from it requires a 25% gain on the remaining $9,600 just to get back to the $12,000 peak — losses and the recovery needed to offset them are not symmetrical, and the gap widens the deeper the drawdown goes.
Why it matters
Drawdown is one of the most important ways to judge how risky a trading strategy really is, often alongside its long-term returns. Two strategies with similar profits can carry very different risk if one has a much deeper maximum drawdown than the other. Tracking drawdown over time is a core part of money management and broader risk management, since a strategy that survives its worst drawdown intact is one a trader can keep using long enough to be profitable overall.
Quick recap
- Drawdown is the percentage decline from an account’s peak value to its lowest point after that peak.
- It is calculated relative to the most recent high, not the original starting balance.
- Recovering from a drawdown requires a proportionally larger gain than the loss itself.
- Monitoring drawdown is central to assessing a strategy’s real risk, alongside its returns.
Trading forex and CFDs carries a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results.