Start free

Maximum drawdown

Everyone agrees drawdown is the fall from a peak. Almost nobody agrees on which peak, measured on what, and that disagreement is what fails funded accounts.

2 min read

The formula

drawdown = (peak − current) ÷ peak × 100
maximum drawdown = the largest such fall in the period

Straightforward until you ask what "current" is measured on.

The edge case: balance or equity

Balance counts only closed trades. Equity includes open positions at their floating value.

The difference is not academic. Hold a position that goes 8% against you and then recovers to close flat, and:

  • on balance the account never moved — no drawdown at all;
  • on equity the account fell 8% and recovered.

A statement showing no losing day is therefore compatible with an account that spent an afternoon deeply underwater. Prop firms measure equity, in real time, which is exactly why traders fail rules they believed they were respecting: the breach happened intraday and the daily summary never recorded it.

Our drawdown figures are computed on closed results, because that is what an imported file contains. Where a firm's rule is written on equity, the file is structurally unable to answer the question, and pretending otherwise would be the failure this whole glossary is written against.

The asymmetry that matters

Recovering from a drawdown takes more than the drawdown itself, and the gap widens fast:

Drawdown Gain needed to recover
10% 11.1%
20% 25%
33% 49.3%
50% 100%
75% 300%

The formula is gain = drawdown ÷ (1 − drawdown). This is the arithmetic behind every piece of advice about position size, and it is why a 50% loss is not "half as bad" as wiping out — it requires doubling the remaining account just to return to where you started. The drawdown recovery calculator works it out for your own figure.

What the maximum hides

A single maximum tells you nothing about how often or how long. Two accounts with an identical 20% maximum drawdown are different businesses if one reached it once and recovered in a week, and the other sits between 15% and 20% permanently.

The figures worth having alongside it are how long the account spent below its previous peak, and how many separate drawdowns above a threshold occurred.

More in Trading terms, defined by how they are computed

  • Net P&LThe result of a trade after commission and swap, and why the sign convention in broker exports makes double-counting so easy.
  • Profit factorGross profit divided by gross loss, the edge case that breaks it, and why a high profit factor on few trades means almost nothing.
  • ExpectancyThe expected value of one trade, the break-even win rate it implies, and why the figure needs an error bar to mean anything.
  • R-multipleExpressing results as multiples of the amount risked, why it survives account growth, and the case where R stops being comparable.
  • Win rateWhat share of trades finished positive, how break-even trades are counted, and why the figure is uninterpretable without the win-to-loss ratio.
  • Trailing drawdownA loss limit that rises with your account and usually never falls back, plus the two sentences in a rulebook that decide when it can end your account.
  • Consistency ruleA cap on how much of your profit may come from a single day or trade, why it exists, and how it turns a winning account into an unpayable one.