Drawdown is one of the most important concepts in trading — and one of the most misunderstood. Understanding drawdown and how to manage it is essential to surviving long-term in any market.
Drawdown measures the decline from a peak account balance to a subsequent trough. It tells you how far your account has fallen from its high point at any given time.
Drawdown % = (Peak Balance − Current Balance) ÷ Peak Balance × 100
Example: If your account reached $12,000 and is now at $9,600, your drawdown is 20%.
Calculate your current drawdown instantly with our Drawdown Calculator.
The most important thing to understand about drawdown is that recovering from a loss always requires a larger gain than the loss itself. This is because you're starting from a smaller base.
This asymmetry is why keeping drawdown small is the single most important goal in trading. A 50% drawdown isn't twice as bad as a 25% drawdown — it's catastrophically worse.
The largest peak-to-trough decline over a given period. This is the key metric professional traders and fund managers use to evaluate risk.
How far you currently are from your most recent account high. This is what you track day-to-day.
For most retail traders, keeping max drawdown under 20% is a reasonable target. Professional hedge funds often target under 10%. Anything over 30% makes recovery extremely difficult psychologically and mathematically.