What Is Drawdown in Trading?

Drawdown is the decline in your account from a peak to a later low, before a new peak is reached. If your balance climbs to 10,000, falls to 8,000 and then recovers, the drawdown was 2,000, or 20%. It is measured from the highest point reached, not from where you started, which is what makes it a measure of pain: how much of what you had you gave back.

Two versions are worth knowing. The current drawdown is how far below its peak the account is right now. The maximum drawdown is the largest such fall in the whole record, and it is the one that matters when judging a strategy. A strategy that earned well but once fell by half asked its owner to sit through that fall, and whether they would have is a better test of it than its average result.

Drawdown matters for a reason that is pure arithmetic: recovery is harder than the fall. A 20% drawdown needs a 25% gain to get back to the peak. A 50% drawdown needs a 100% gain. The deeper the hole, the steeper the climb, and the climb has to be done from a smaller balance. The drawdown recovery calculator gives the figure for any depth.

How deep a drawdown gets is mostly decided by position size. If you risk 1% of your balance on each trade, ten losses in a row take about 9.6% off the account. At 5% per trade, the same ten losses take about 40%. Nothing about the strategy changed. Only the size did, and with it the chance of a fall you cannot recover from. The risk of ruin calculator shows how risk per trade changes that chance.

To measure yours, you need the order of your results. The drawdown is the largest fall of your cumulative result from a running peak. If you have an exchange export, the analyzer below calculates it for you, along with the other numbers that describe how your results were built.