drawdown
The fall of the account from its peak to a later low, shown as a percentage.
Drawdown is the decline in an account from a previous high point to a later low point, usually shown as a percentage of that high. It describes how far the account fell before recovering or reaching a new peak.
A drawdown measures past loss, not the next likely move. A larger percentage loss needs a larger percentage gain to return to the starting balance because the gain applies to a smaller amount.
Track drawdown alongside the account balance and the dates of peaks and lows. Costs and new deposits should be handled consistently in the record.
Example
Nora's practice account reaches a peak of $10,000, then falls to $8,000. The drawdown is ($10,000 − $8,000) ÷ $10,000 × 100 = 20%.
To return from $8,000 to $10,000 requires a gain of $2,000 ÷ $8,000 × 100 = 25%. A 20% fall therefore needs a 25% gain from the lower balance to recover, before considering costs or deposits.
Common mistakes
- Measuring the fall from the wrong high point.
- Assuming a 20% loss needs only a 20% gain to recover.
- Confusing a drawdown percentage with the cash amount lost.
- Most people who trade lose money.
Learn it in the course
- Drawdown: why losses hit harder than gains · A 50% loss needs a 100% gain to recover: see drawdown, the recovery maths and how the same trades at a bigger size can sink an account that should have grown.
- Case: compare two trade lists · Two journals, two styles: compare expectancy after costs, drawdown, sample size and discipline, then say which plan is worth continuing and what would change your mind.
- Trading vs investing: two different games · Holding for years and trading for days are different games with different risks, and someone is always on the other side.