Essential

Drawdown

The decline from a peak to a trough in account value, measuring the loss from highest to lowest point.

Definition

Drawdown measures the decline in account value from its highest point (peak) to its lowest point (trough) before recovering. It's expressed as a percentage and is a key metric for evaluating trading strategy risk and trader performance.

How It Works

Peak equity: $10,000
Trough equity: $8,000
Drawdown: ($10,000 - $8,000) / $10,000 = 20%
Maximum drawdown = largest peak-to-trough decline

Trading Tips

Keep maximum drawdown under 20-30%

Drawdown affects psychology - plan for it

Recovery requires larger gains (20% loss needs 25% gain to recover)

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