Drawdown

The recovery asymmetry

Drawdown is measured from the highest point the account reached to the lowest point after it. The reason it dominates risk management is arithmetic: losses and the gains needed to undo them are not symmetrical.

• A 10% loss needs an 11% gain to recover.
• A 20% loss needs 25%.
• A 33% loss needs 50%.
• A 50% loss needs 100%.
• A 75% loss needs 300%.

The types you will meet

• Maximum drawdown: the largest peak-to-trough decline over the whole history. The headline risk number.
• Current drawdown: how far below the peak you are right now.
• Daily drawdown: the decline within a single session, the rule most funded programmes enforce hardest.
• Closed-balance vs equity drawdown: whether open positions count. Equity-based measurement is stricter and includes unrealised losses.

How to control it

Drawdown depth is a direct function of risk per trade multiplied by the length of your losing streaks. You cannot control the streaks — they are a property of randomness — so you control the multiplier.

At 1% risk, ten consecutive losses is roughly a 10% drawdown. At 3%, the same streak is closer to 26%. The strategy did not change; only the sizing did.

• Set risk per trade so a realistic streak stays inside a drawdown you can trade through.
• Cap the day. A daily loss limit prevents one session from creating a month of recovery.
• Reduce size while in drawdown rather than increasing it to catch up.
• Watch correlation. Three positions in instruments that move together is one position at triple size.
• Know whether your worst drawdown came from one event or one habit. They need different fixes.

Worked example

An account peaks at $52,000 and falls to $46,800. The drawdown is $5,200, or 10% from the peak. Recovering to the old high requires an 11.1% gain on the reduced balance.

If that decline came from eight consecutive losses at 1.25% risk, the fix is sizing, not strategy. Halving risk to 0.6% turns the same streak into a 5% dip — recoverable in a normal week rather than a month.

Common mistakes

• Increasing size during a drawdown to recover faster, which is the single most common way a recoverable dip becomes terminal.
• Measuring from the starting balance instead of the peak, which understates the real decline.
• Ignoring open positions when the programme or broker measures on equity.
• Judging a strategy on returns without looking at the drawdown that produced them.
• Assuming the worst historical drawdown is the worst possible one. It is simply the worst so far.

Put it into practice

Frequently asked questions

What is an acceptable drawdown?

That depends on your tolerance and, in a funded account, on the rules. Many traders treat 20% as a serious warning and 30% as a point to stop and reassess the strategy rather than the market.

How do I calculate drawdown percentage?

Subtract the trough from the peak, divide by the peak, and multiply by 100. The drawdown calculator also shows the gain required to recover.

What is the difference between drawdown and loss?

A loss is one trade. Drawdown is the cumulative decline from the account's high-water mark, which can include many trades and periods of partial recovery.

How do I recover from a large drawdown?

Reduce size, return to the setup with the clearest edge, and accept a slower path. Raising risk to recover faster increases the chance of never recovering at all.

Related terms