Maximum drawdown

Maximum drawdown is the largest peak-to-trough decline in your account equity over a period, expressed in currency or as a percent of the prior high. It tells you the worst pain a strategy has already put you through — the deepest hole between an equity high and the low that followed before a new high was set. Two accounts can post the same yearly return while one dipped 8% at its worst and the other bled 42%; the second is a far more dangerous way to make the same money. It is the single number that most honestly describes the downside you have to survive.

How it's calculated

Walk your equity curve point by point. At each step, track the running peak — the highest equity seen so far. The drawdown at any moment is how far you sit below that peak.

Worked example. Your equity moves: 10,000 → 12,000 → 9,000 → 11,000 → 8,500 → 13,000.

• At 12,000 the running peak becomes 12,000.
• Drop to 9,000: drawdown = (9,000 − 12,000) ÷ 12,000 = −25%.
• Recover to 11,000: still below the 12,000 peak, drawdown = −8.3%. The peak does not reset because you never made a new high.
• Fall to 8,500: drawdown = (8,500 − 12,000) ÷ 12,000 = −29.2%. This is the deepest point.
• Climb to 13,000: new high, peak resets, drawdown returns to 0%.

The maximum drawdown for this stretch is −29.2% — measured from the 12,000 peak to the 8,500 trough, not from your starting balance. That distinction matters: drawdown is always relative to the most recent equity high, not to where you began.

Why it matters

Maximum drawdown is the number that ends accounts. Returns are what you show off; drawdown is what actually blows people up. A losing streak that pushes you down 50% now needs a 100% gain just to get back to even — the recovery math is brutally asymmetric, which is exactly why deep drawdowns are so hard to climb out of. Run the numbers yourself with the drawdown recovery calculator before you assume a bounce-back is realistic.

If you trade for a prop firm, max drawdown isn't a metric — it's a hard wall. Most evaluations set a maximum drawdown limit (often 8–12%, sometimes trailing your equity high) and breaching it fails the account instantly, regardless of how profitable you were the day before. Knowing your historical max drawdown tells you whether a strategy can even fit inside those rails.

Then there's the psychological cost, which the percentage understates. A 30% drawdown that grinds on for four months changes how you trade: you cut winners early, oversize to "make it back," and abandon the plan right before it would have recovered. The drawdown that breaks you is rarely the deepest one on paper — it's the long one that erodes your conviction.

Related concepts

Maximum drawdown is one measurement in a family. Drawdown recovery covers the asymmetric gain needed to climb back to even, and risk of ruin estimates the probability that a string of losses wipes the account entirely. Pair drawdown with the Sharpe ratio to judge whether your returns justify the volatility you endured, and control the depth of the next drawdown up front through disciplined position sizing. To watch your real peak-to-trough curve build in real time across every account, Tradeways dashboards chart it directly from your imported trades.