What is Drawdown?
A drawdown is the peak-to-trough decline in your trading account equity, usually expressed as a percentage from the highest point. It measures the worst loss from a high water mark.
Drawdown Explained
Drawdown is the most important risk metric. A 10% drawdown requires an 11% gain to recover. A 50% drawdown requires a 100% gain. This non-linear relationship is why controlling drawdowns is critical. Most professional traders aim to keep maximum drawdown under 20%. Knowing your maximum tolerable drawdown helps set position sizes and stop loss levels.
Real-World Example
Your account grows from $10,000 to $12,000, then drops to $9,600 during a losing streak. Your drawdown is $2,400 from the peak, or 20%. To recover, you need to make $2,400 on a $9,600 account — a 25% return.
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