Drawdown is the peak-to-trough decline in your trading account balance, expressed as a percentage. It measures the largest loss from a high point before a new high is reached.
How to Calculate
Formula: Drawdown = (Peak - Trough) / Peak × 100
Example:
- Account peak: $10,000
- Drops to: $7,500
- Drawdown: ($10,000 - $7,500) / $10,000 = 25%
Drawdown Levels
| Level | Meaning |
|---|---|
| 5-10% | Normal fluctuation |
| 10-20% | Caution — review strategy |
| 20-30% | Serious — reduce position size |
| 30%+ | Critical — stop trading, reassess |
Recovery Table
| Drawdown | Gain Needed to Recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
Key Points
- Lower drawdowns = better risk management
- Professional traders aim to keep max drawdown under 20%
- Track drawdown alongside profit for complete performance picture