Drawdown
The decline from a peak to a trough in account value, measuring the loss from highest to lowest point.
Quick answer
Drawdown measures the decline from your account's peak to its trough before recovery, expressed as a percentage. It is the key metric for judging strategy risk.
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
1
Keep maximum drawdown under 20-30%
2
Drawdown affects psychology - plan for it
3
Recovery requires larger gains (20% loss needs 25% gain to recover)
Related Terms
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