Drawdown
This page covers drawdown as a general trading concept: the peak-to-trough decline in an account or an instrument's price. For the prop trading rule that caps total loss in a funded-account evaluation, see Maximum Drawdown.
Drawdown is the decline in an account's equity from a peak to a subsequent trough, expressed as a percentage of the peak.
It measures how far an account has fallen from its highest point, not how much it has lost overall. A new peak resets the reference, so every drawdown is measured from the most recent high-water mark. The same concept describes an instrument's price fall from a high to a low.
This page covers the mechanic; it is not trading advice.
What a drawdown is, and why it is hard to climb out of
An account that grows from $10,000 to $12,000 and then falls to $10,800 is in a drawdown of $1,200, or 10% measured from the $12,000 peak. The drawdown is not measured from the $10,000 start; it is measured from the high-water mark the account reached. When the account makes a new high, the drawdown resets to zero and the next one is measured from there.
The asymmetry catches most traders out. A 20% drawdown does not need a 20% gain to recover. The gain is calculated on the reduced balance, so a 20% fall to $8,000 needs a 25% gain to return to $10,000. The deeper the hole, the steeper the climb, and the loss and the recovery are not symmetric.
Recovery gain = 1 ÷ (1 − drawdown) − 1.
This is the mechanical case for limiting drawdown rather than chasing it back. A 50% drawdown demands a 100% gain merely to break even, and a 90% drawdown demands 900%. Past a certain depth the recovery is no longer a trading problem; it is arithmetically out of reach on any normal return profile.
Drawdown as the constraint on position size
Drawdown depth is driven by risk per trade and the length of a losing streak, both of which are knowable in advance. A $10,000 account risking 5% per trade has $9,500 after one loss; after ten consecutive losses it holds $10,000 × 0.95¹⁰ = $5,987, a 40% drawdown needing a 67% gain to recover.
The same account risking 1% per trade holds $10,000 × 0.99¹⁰ = $9,044 after the same ten-loss streak, a 9.6% drawdown needing an 11% gain. The losing streak is identical. The risk-per-trade percentage is what turns it from routine to account-ending.
Ten consecutive losses are not rare. At a 55% win rate the chance that any ten-trade run is all losses is 0.45¹⁰, about 1 in 2,900, which a trader taking 50 trades a week, roughly 2,600 trades a year, should expect about once a year. Position size has to be set so the account survives the streak the win rate will eventually produce, not the streak the trader hopes for. A wider Risk-reward ratio wins less often, which lengthens the losing runs between wins.
Account drawdown versus instrument drawdown
The same word describes two things. Account drawdown is the fall in a trader's equity, the figure that governs survival. Instrument drawdown is the fall in a market's price from a high to a low, such as XAU/USD dropping from a peak to a trough. A trader holding a position through an instrument's drawdown experiences it as an account drawdown scaled by how large the position is relative to the account, its effective Leverage, which is the bridge between the two meanings.
Drawdown as a measure of strategy robustness
Drawdown is also how a strategy is judged. Two strategies can post the same annual return while one climbs smoothly and the other reaches it through a 40% mid-year drawdown. The second is the more fragile: it demands more capital to sit through, it is more likely to be abandoned at the bottom, and a run slightly worse than the backtest can breach a level the first never approaches. Return measured against the maximum drawdown taken to earn it says more about a strategy than the return alone.
Maximum drawdown (prop trading)The funded-account rule that caps total loss in an evaluation — set by the firm as a static or trailing limit, not the general peak-to-trough measure on this page.Related terms
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Common questions
How is the recovery percentage from a drawdown calculated?
The gain needed to recover is one divided by one minus the drawdown, minus one: recovery gain = 1 ÷ (1 − drawdown) − 1. A 25% drawdown leaves 75% of the balance, so recovery = 1 ÷ 0.75 − 1 = 33.3%. A 50% drawdown leaves half, so recovery = 1 ÷ 0.50 − 1 = 100%. The gain is always larger than the loss because it is earned on the smaller post-loss balance.
What is the difference between drawdown and maximum drawdown?
In general usage, the maximum drawdown is the largest peak-to-trough decline an account or strategy has recorded over a period — a statistic that describes the worst stretch so far. In prop trading, Maximum Drawdown is a specific firm-set rule that caps how far an evaluation account may fall before it is terminated. The general statistic is descriptive; the prop rule is a hard floor with consequences. Both are measured from a peak, which is why the names overlap.
Does a drawdown mean a strategy is broken?
Not by itself. A drawdown is the expected consequence of the win-rate distribution: any strategy that loses some trades will string losses together and decline from its peak at times. The question is whether the depth exceeds what the position-sizing plan was built to survive. A drawdown inside the planned floor is routine; one that breaches the floor signals the risk per trade was too high for the strategy's real win rate, not necessarily that the edge is gone.
What is a high-water mark?
A high-water mark is the highest equity an account has reached, and drawdown is always measured down from it. The mark only ratchets upward: a new peak sets a new mark, and the account is never again in drawdown relative to a lower point. In performance-fee and prop contexts the high-water mark also defines when new profit counts, because gains that merely recover a prior drawdown return the account to its mark rather than setting a new high.