Drawdown

In practice

Your account peaks at $20,000 and then slides to $15,000 — a 25% drawdown. Recovering to $20,000 now needs a 33% gain. Had it dropped 50% to $10,000, you would need to double the account simply to get back to where you started.

Why it matters for traders

Drawdown is the measure of pain a strategy inflicts, and its non-linear math is the reason 'just hold on' is dangerous: deeper holes need disproportionately larger gains to climb out. Monitoring drawdown, and capping the maximum you will tolerate before pausing, protects both your capital and your ability to keep trading rationally.

Common pitfall

The pitfall is judging a strategy by its profit while ignoring the depth and length of its drawdowns, then abandoning a sound system during a normal losing streak. Drawdown also tempts traders to 'make it back fast' by increasing size, which deepens the hole. Know a strategy's historical drawdown before trading it, size so that the worst case is survivable, and measure success against the plan — not against the last few trades.

Putting it in context

This idea sits at the heart of survival in trading. Markets are uncertain by nature, so the only things fully under your control are where you enter, where you exit, and how much you risk — and order types are the tools that enforce those decisions. A rule worth adopting early is that every live position has a predefined exit before it is opened, placed as an actual order with the broker rather than a mental note. Mental stops are quietly abandoned exactly when they are needed most, during fast moves and emotional moments. Traders who last are rarely better forecasters than those who blow up; they are simply far more consistent about mechanics like this one.

Lessons that use this term

• Drawdown & the recovery maths

  Why a 50% loss needs a 100% gain to get back, and what that means for risk per trade.

Related terms