Drawdown
The decline from a peak to a trough in account value, measuring the loss from highest to lowest point.
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.
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)
Drawdown Example
Say your $10,000 account peaks at $12,000, then slides to $9,600 before recovering. That $2,400 slide from the peak is a 20% drawdown, and it needs a 25% gain just to get back. The math of holes is crueler than the math of climbs.
How Traders Use Drawdown
Judge every strategy by its worst drawdown first, returns second. Cap personal drawdown with a circuit breaker: down 6% in a month, halve size. Down 10%, stop and review. Professionals survive because they quit while the hole is small.
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