Trading Drawdown: A Complete Guide

Applies to any trading or investment account · Uses the Drawdown Calculator

By SOFTYTOOLS Editorial Team · Published October 6, 2026 · Updated October 6, 2026

What drawdown means

A drawdown is the fall in your account value from a previous high point to a later low point. If your account reached $12,000 and has since dropped to $9,600, you are in a drawdown of $2,400, which is 20% of the peak. It is the most direct measure of how much pain a strategy puts you through on the way to whatever profit it eventually makes.

Drawdown matters because profit alone says very little about how a result was achieved. Two traders can both finish a year up 30%. One may have got there with a worst dip of 6%; the other may have survived a 45% collapse and recovered. The final numbers match, but the experience, the risk taken and the odds of quitting or blowing up along the way are completely different.

The drawdown formula

The Drawdown Calculator uses two formulas:

• Peak is the highest balance (or equity) the account has reached so far.
• Current is the balance now, or at the low point you are measuring. When measuring a past dip, use the lowest value reached before the account made a new high.
• Peak − Current is the money lost from the peak.
• Dividing by the peak gives the size of the fall. Dividing by the current balance gives the gain you need on what is left to get back to the peak.

Worked example. Peak balance $12,000, current balance $9,600.

• Amount lost = $12,000 − $9,600 = $2,400
• Drawdown = $2,400 ÷ $12,000 × 100 = 20%
• Recovery needed = $2,400 ÷ $9,600 × 100 = 25%

Those are the same default numbers shown in the Drawdown Calculator, so you can check the arithmetic yourself.

Why recovering is harder than losing

The two percentages differ because they are measured against different balances. Lose 50% of $10,000 and you have $5,000. To return to $10,000 you must earn $5,000 on a base of only $5,000, which is a 100% gain. Rearranged, the recovery formula becomes:

Small drawdowns are close to symmetrical: a 5% loss needs only a little more than 5% back. Past about 20%, the required gain starts to outrun the loss quickly, and beyond 50% the recovery becomes a different kind of task entirely. This is the mathematical foundation behind most risk management rules: keeping drawdowns shallow is far cheaper than climbing out of deep ones.

Reading drawdown from an equity curve

The calculator takes two numbers, but real accounts move continuously. Here is a short equity history for a $10,000 account, recorded at the end of each week:

To find the maximum drawdown, walk through the history, track the highest balance so far, and record the largest percentage fall below it. Here it is 15% in week 5, when the balance dropped from the $11,500 peak to $9,775, a loss of $1,725. Getting back to the peak required a gain of $1,725 ÷ $9,775 = 17.65%, and the account exceeded its old high in week 7.

The calculator measures one peak-and-current pair at a time. To find your maximum drawdown, enter the peak and the lowest balance that followed it, and repeat for each peak you want to examine. Your broker statement or a spreadsheet of balances works well for this.

Drawdown duration

Depth is only half the picture. The time spent below a previous peak matters too. In the table above, the account was below its highest point for weeks 3, 5 and 6, and the 15% dip took two weeks to recover. A strategy with a modest 10% drawdown that lasts eighteen months can be harder to endure than a 20% drawdown that recovers in six weeks.

Balance versus equity

If you hold open positions, your account equity includes unrealised profit and loss, while the balance usually counts only closed trades. Drawdown measured on closed-trade balance can look milder than the real dip you sat through while positions were open. When judging the risk of a strategy, measure from equity where you can.

How risk per trade drives drawdown

Drawdown is not random. It is largely determined by two things: how much you risk per trade, and how many losses arrive in a row. If you risk a fixed percentage of your current balance on each trade, the balance after n consecutive full losses is:

Ten straight losses at 1% risk costs 9.56%, which is survivable and recoverable with a 10.57% gain. Ten straight losses at 5% costs 40.13% and demands a 67% gain to repair. The strategy is identical in both cases. Only the sizing changed.

Note that the drawdown is slightly smaller than risk multiplied by the number of losses (ten 1% losses is 9.56%, not 10%), because each successive loss is taken from a smaller balance.

How likely is a long losing streak?

More likely than most people expect. Assuming each trade is independent with a fixed win rate (a simplification that real markets do not strictly follow), the probability of seeing at least one run of 10 consecutive losses somewhere in a sequence of trades is:

A trend-following strategy that wins 40% of the time and pays well when it does win will, over a few hundred trades, very probably produce a ten-loss streak at some point. That is not a sign the strategy is broken. It is something the position sizing has to be able to absorb. The choice of per-trade percentage is therefore a drawdown decision as much as a profit decision; the trading risk percentage guide works through it.

Turning drawdown into rules

Traders commonly use drawdown in three ways:

• A step-down rule. For example, halve per-trade risk once the account is 10% below its peak, and restore it when a new peak is reached. This slows losses while the strategy is out of form.
• A hard stop. For example, pause trading entirely at a 20% drawdown and review the journal before resuming. At that point you need a 25% gain to recover, which is a good moment to check whether something has changed.
• A planning limit. Before trading a strategy, decide the largest drawdown you can accept in money and in emotional terms, then back-solve the risk per trade that keeps the likely streaks inside that limit.

These numbers are illustrations to adapt, not recommendations. A single threshold that suits one trader's strategy and temperament may not suit another's.

Limitations and cautions

• Past maximum drawdown is not a ceiling. The worst drop in a backtest or a short live record is a lower bound on what can happen. A longer history or different market conditions will usually produce a worse one.
• Backtests tend to understate drawdown. Slippage, spreads, missed fills and the emotional effect of real money are rarely captured fully.
• The calculator needs your inputs. It does not read your account. It computes from the peak and current balance you type, so a wrong peak gives a wrong answer.
• Deposits and withdrawals distort drawdown. Adding money can hide a drawdown and withdrawing can exaggerate one. For a clean measurement, adjust for cash flows or track a separate performance series.
• Drawdown ignores the path of returns. It captures the worst dip but not how often small dips happen. It is best viewed alongside other measures.

One related measure is the Calmar ratio, which divides annualised return by maximum drawdown. It gives a rough idea of how much return a strategy delivers per unit of worst-case pain, but, like any single statistic, it is only as reliable as the history behind it.

Common mistakes

• Measuring drawdown from the starting deposit instead of the peak. That is a different measure (sometimes called absolute drawdown). The peak-based version is what the recovery maths depends on.
• Assuming a 30% loss needs a 30% gain. It needs 42.86%.
• Raising risk to recover faster. Larger bets during a drawdown increase the chance of a deeper one.
• Judging a strategy by its win rate alone. A high win rate with occasional large losses can have a worse drawdown profile than a lower win rate with controlled losses.
• Ignoring open positions. Unrealised losses are part of the real drawdown.

How to use the Drawdown Calculator

1. Open the Drawdown Calculator.
2. Enter your highest account balance in Peak balance.
3. Enter your lowest or current balance in Current balance.
4. Read Drawdown (the percentage fall), Amount lost from peak, and Gain needed to recover.

If the current balance is above the peak, there is no drawdown, and the tool will say so. If the current balance is zero, the account is fully drawn down and no percentage gain can recover it. The tool also flags drawdowns over 20% as a prompt to review sizing.

Frequently asked questions

Related guides and tools

• Run your numbers in the drawdown calculator.
• See how drawdown fits into a full system in the risk management guide.
• Choose a per-trade percentage that your drawdown tolerance can support in the trading risk percentage guide.
• Learn how size is calculated in the position size guide.
• See why losses compound against you in the compound growth guide.
• Browse every topic in the guides library.

Try the Drawdown Calculator