Drawdown is the fall from your account's highest equity point to its lowest point before a new high is made, measured as a percentage of that peak. An account that grows to $12,000, drops to $9,600, then recovers has taken a 20% drawdown. It measures the depth of the hole, not the size of any single loss.
It is the number that decides whether a strategy is survivable, and the one most new traders never calculate. Two systems can produce identical annual returns while one of them takes its owner through a 12% dip and the other through a 45% collapse. Only one of those gets traded to the end of the year by an actual human being.
The recovery arithmetic
The reason drawdown deserves this much attention is that losses and the gains needed to undo them are not symmetrical. A 20% fall is not undone by a 20% rise, because the rise is calculated on a smaller base.
| Drawdown | Gain needed to get back to even |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 70% | 233% |
| 90% | 900% |
The formula is simply the drawdown divided by what remains: a 50% loss leaves half the account, and half has to double. Notice where the curve turns. Below about 15% the required recovery is barely worse than the loss; past 30% it starts to run away; past 50% you need a better year than most professionals have to get back to where you already were.
This is the entire argument for small per-trade risk, and it is why the 1% rule is not timidity but arithmetic. Ten consecutive losses at 1% leaves you down about 9.6% and needing roughly 10.6% to recover — an ordinary month. Ten consecutive losses at 5% leaves you down 40% and needing 66.7%.
The terms, precisely
| Term | What it means |
|---|---|
| Peak-to-valley drawdown | The fall from one equity high to the low before the next high |
| Maximum drawdown | The deepest peak-to-valley fall in the whole record |
| Current drawdown | How far below your all-time high equity sits right now |
| Drawdown duration | How long you spent below the old peak before reclaiming it |
| Closed vs open drawdown | Measured on realised equity only, or including open positions |
Duration is the one traders skip and regulators do not. A 15% drawdown that lasts three days is an event; a 15% drawdown that lasts seven months is a different experience entirely, and it is the one that ends careers — not because the money is gone, but because seven months of grinding below your old high is where discipline quietly erodes.
Regulators treat drawdown as a headline number
If you want a sense of how seriously professionals take this, look at what US law requires managed-futures professionals to disclose. Under CFTC rules, a commodity trading advisor's disclosure document must state the worst peak-to-valley drawdown for the trading program over the most recent five calendar years and year-to-date, as a percentage of net asset value, together with the months and years in which it occurred (17 CFR § 4.35, Performance disclosures).
The definition in the rule is worth borrowing for your own record-keeping: the greatest cumulative percentage decline in month-end net asset value during any period where the starting month-end value is not equalled or exceeded by a later one. That is a strict measure — it does not let a good week interrupt the count — and applying it to your own equity curve gives you a number that means the same thing as the one a professional would quote.
How much is normal?
Any specific percentage quoted without a strategy attached is noise, so treat the following as a way to reason rather than as a benchmark:
- Your worst drawdown will be deeper than your worst losing streak. Streaks compound with the partial recoveries between them. A system with a realistic worst streak of eight losses should plan for a drawdown well beyond eight times the per-trade risk.
- Risk per trade sets the scale. Double the risk per trade and you roughly double the drawdown for the same sequence of outcomes. This is the single lever with the most influence, and it is fully under your control through sizing positions from risk.
- Lower win rates mean deeper drawdowns. A system that wins 35% of the time with large winners is perfectly viable and will spend long periods underwater. If that is your system, the drawdown is a feature to be financed, not a fault to be fixed.
- A drawdown outside anything in your record is a signal. Not proof the edge is gone, but a reason to reduce size and audit the process rather than to trade harder.
What you are looking for is not a magic number but a match between the drawdown your strategy can produce and the drawdown you will actually sit through without abandoning the plan. Most strategies do not fail; the people running them stop following them somewhere around the point the account has stopped feeling recoverable.
Writing a stopping rule before you need one
The moment you are in a deep drawdown is the moment you are least equipped to decide whether to keep trading. So the rule gets written when nothing is at stake. A workable three-tier structure:
- Daily limit. Two or three losses, or a set percentage — whichever comes first. Hit it and the screens go off for the day. No exceptions on the day you most want one.
- Weekly limit. Roughly double the daily figure. Hitting it means the week is finished and the weekend is for review rather than revenge.
- Monthly or account-level limit. The number at which you stop trading live entirely, drop to minimum size, or go back to paper trading until the process is clean again. For most retail traders this sits somewhere well under 20%, precisely because of the recovery table above.
The limits are not there to prevent losses; they are there to prevent one bad sequence from becoming an unrecoverable one. Trading through a stopping rule because the setup looked good is one of the mistakes that blow up trading accounts, and the deeper hole it creates is the subject of risk of ruin.
Frequently Asked Questions
What is drawdown in trading?
Drawdown is the fall from an account's highest equity point to its lowest point before a new high is made, expressed as a percentage of that peak. An account that grows to $12,000, falls to $9,600, then recovers has had a 20% drawdown. It measures the depth of the hole rather than the loss on any single trade.
How much drawdown is normal?
There is no universal figure — it depends on the strategy and the risk taken per trade, and any specific percentage quoted without a system attached is meaningless. What is generally true is that a strategy risking 1% per trade will see materially shallower drawdowns than one risking 5%, and that a drawdown roughly two to three times your worst expected losing streak is worth planning for.
Why is a big drawdown so hard to recover from?
Because the gain needed is calculated on a smaller base. A 20% fall needs a 25% gain to get back to even, a 50% fall needs 100%, and an 80% fall needs 400%. The required recovery accelerates far faster than the loss, which is why keeping drawdowns shallow matters more than any effort to make them back quickly.
When should you stop trading during a drawdown?
At a level you set in advance, in writing, before the drawdown starts. A common structure is a daily limit, a weekly limit and a monthly limit, each triggering a longer pause. The point of writing it down beforehand is that the moment you are actually in a drawdown is the moment you are least able to judge whether to keep going.
Bottom line
Drawdown is the number that decides whether you get to keep trading a strategy long enough for its edge to show up. Keep it shallow by keeping per-trade risk small, measure it from the first day rather than reconstructing it later, and set the stopping levels while the account is at a high rather than in the middle of the fall. The recovery table is not a warning, it is a design constraint: everything about how you size and stop should be aimed at never needing the bottom rows. The system this sits inside is risk management in trading.