Drawdown definition

Drawdown is the peak-to-trough decline in account balance or equity over a period. It shows how far a trading account falls from a previous high before it recovers.

Drawdown is usually expressed as a percentage of the account's peak value. A larger drawdown means a deeper loss, and a deeper loss needs a stronger gain to return to the previous high.

Drawdown measures the drop from a peak, not the loss on a single trade. One peak-to-trough fall is a drawdown; the largest such fall over the whole period is the maximum drawdown, and that figure is the one traders use to size risk and set position limits.

Drawdown Example

Your account rises to USD 10,000 and then falls to USD 8,000.

The drawdown is:

USD 10,000 - USD 8,000 = USD 2,000

As a percentage of the peak:

USD 2,000 √∑ USD 10,000 √ó 100 = 20%

The account is in a 20% drawdown before any recovery.