What is drawdown?
Drawdown is the decline in the value of an investment or trading account from a peak to a subsequent low before a new peak is reached.
It is usually expressed as a percentage and is a key way of measuring how much value has been lost during a losing period.
In simple terms, drawdown measures how far an account falls from its highest point.
How drawdown is measured
Drawdown is calculated from the highest value an account or asset has reached to the lowest point that follows, before a new high is made. If an account grows to 10,000 and then falls to 8,000, that is a 20 per cent drawdown. The maximum drawdown records the largest such fall over a period and is widely used to assess the risk of a strategy.
Why drawdown matters
-
It shows the depth of losing periods, not just final results
-
Larger drawdowns need larger gains to recover
-
It helps compare the risk of different strategies
-
It can affect a trader’s ability to stay disciplined
Recovering from a drawdown
| Drawdown |
Gain needed to recover |
| 10% |
About 11% |
| 20% |
25% |
| 50% |
100% |
Why recovering from a drawdown is harder than it looks
A drawdown takes a larger percentage gain to recover than the percentage lost, because the gain is calculated from a smaller balance. A 20 percent loss, for example, needs a 25 percent gain to return to the starting point, and a 50 percent loss needs a 100 percent gain. This maths is why many traders focus on limiting drawdowns through position sizing and risk controls, rather than relying on clawing back a deep loss later. Setting a maximum acceptable drawdown in advance can help a trader decide when to pause, cut position sizes or review a strategy. Many treat a deep drawdown not just as a financial setback but as a prompt to check whether market conditions have changed or the approach needs adjusting.
Why drawdown shapes position sizing
Drawdown highlights an uncomfortable truth: the deeper the fall, the harder the climb back, because a larger percentage gain is needed to return to the previous peak. Managing position size and using risk controls can help limit drawdowns, but they cannot remove them. Every strategy experiences losing runs, so planning for them is part of trading.
Working through a drawdown
Suppose an account grows to $10,000, then falls to $8,000 before recovering. That $2,000 fall from the peak is a 20 percent drawdown. Tracking the largest such fall helps a trader judge how much a strategy can lose from peak to trough, and whether they could hold through it.
Managing drawdown as part of risk control
Drawdown is one of the most honest measures of risk because it focuses on losses rather than headline returns. Understanding it helps traders set realistic expectations and manage their capital with discipline, keeping in mind that periods of decline are a normal and unavoidable part of trading.
Risk Warning:Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
Back
