Trading Drawdown Explained
Drawdown is the fall of an account from its peak. How to calculate it, the difference between balance and equity drawdown, maximum and daily drawdown, and how to set limits that actually protect an account.
By the AURAX teamPublished 6 min read
On this page (8)
Drawdown is how far an account has fallen from its highest point, usually as a percentage of that peak. An account that grew from $10,000 to $12,000 and then fell to $9,000 is in a 25% drawdown, measured from the $12,000 peak — not 10%, measured from the deposit. The maximum drawdown is the deepest such fall over a period, and it is the single most important number for judging whether a strategy can be lived with.
drawdown = (peak − current) ÷ peak
- peak = the highest equity (or balance) reached so far
- ($12,000 − $9,000) ÷ $12,000 = 25%
Balance drawdown vs equity drawdown
Balance counts only closed trades. Equity is balance plus the profit or loss of open positions. The two drawdowns can be very different:
| Balance drawdown | Equity drawdown | |
|---|---|---|
| Includes open losses | No | Yes |
| Can be hidden by | Keeping losing trades open | Nothing — it is what the account is worth right now |
| Use it for | Accounting | Risk |
The drawdown figures you will see
| Figure | Meaning |
|---|---|
| Current drawdown | How far below its peak the account is now |
| Maximum drawdown | The deepest peak-to-trough fall over the period, in money and in % |
| Relative drawdown (MT5 report) | The largest drawdown as a percentage of the peak it fell from |
| Absolute drawdown (MT5 report) | How far equity fell below the initial deposit |
| Daily drawdown | The fall within one trading day — often limited separately |
| Drawdown duration | How long the account stayed below its previous peak |
Two strategies with the same maximum drawdown can feel completely different. One that recovers in a week and one that stays under water for a year test a trader's discipline in different ways — duration matters as much as depth.
Calculating drawdown from an equity record
Maximum drawdown is found by walking through the equity record, keeping track of the highest value so far — the running peak — and measuring each point against it:
| Day | Equity | Running peak | Drawdown |
|---|---|---|---|
| 1 | $10,000 | $10,000 | 0% |
| 2 | $10,800 | $10,800 | 0% |
| 3 | $10,200 | $10,800 | 5.6% |
| 4 | $11,500 | $11,500 | 0% |
| 5 | $9,775 | $11,500 | 15.0% |
| 6 | $10,350 | $11,500 | 10.0% |
| 7 | $11,900 | $11,900 | 0% |
The maximum drawdown in this record is 15%, on day 5 — even though the account never fell below its starting $10,000 by more than 2.3%. Measuring from the deposit would have hidden most of the risk. The drawdown lasted from day 4's peak until day 7, when a new high was made; that stretch is the drawdown's duration.
Why drawdown matters more than return
Losses and gains are not symmetric. A 20% loss needs a 25% gain to recover; a 50% loss needs 100%; a 75% loss needs 300%. The deeper the drawdown, the harder the climb back, which is why protecting against large drawdowns matters more than chasing a higher return.
| Loss | Gain needed to recover | Relative size |
|---|---|---|
| −10% | +11% | |
| −20% | +25% | |
| −30% | +43% | |
| −40% | +67% | |
| −50% | +100% | |
| −60% | +150% | |
| −75% | +300% | |
| −90% | +900% | off scale |
Why a 50% loss requires a 100% gain works through the arithmetic and what it means for how long recovery takes.
Setting drawdown limits
A drawdown limit is a decision made in advance, while calm, about when to stop. Two kinds work together:
| Limit | Typical action | Purpose |
|---|---|---|
| Maximum (account) drawdown | Close everything, stop trading, require a human decision to restart | Protect the account from the tail — the one move that would end it |
| Daily drawdown | Stop opening new trades until the next day | Stop a bad day from becoming a disaster, without abandoning positions that may recover |
- Measure from the peak of equity, not the starting deposit — otherwise a profitable account can give back everything before the limit is reached.
- Enforce it in software, not in willpower. The moment a limit is needed is the moment a person is least likely to respect it.
- Size the strategy so the limit is rarely hit. A limit that fires every month is not a safety net; it is the strategy.
Working backwards from a drawdown limit
A drawdown limit can set the size of every trade. Decide the deepest drawdown you accept and the longest losing streak you want to survive, then solve for the risk per trade:
risk per trade = 1 − (1 − max drawdown)^(1 ÷ losing streak)
- 20% limit, 10 losses in a row: 1 − 0.8^(1/10) ≈ 2.2% per trade
- 20% limit, 15 losses in a row: ≈ 1.5% per trade
- 10% limit, 10 losses in a row: ≈ 1.0% per trade
The losing streak to plan for should come from testing, with a margin on top — the longest streak in a backtest is a floor, not a ceiling. For strategies that hold several positions at once, the unit is not the trade but the worst combined loss, which is why grids are sized from their full-depth loss.
How drawdown looks in different strategies
| Strategy | Typical drawdown pattern |
|---|---|
| Trend-following | Long, shallow drawdowns while markets chop sideways; recovered in a few strong moves |
| Mean reversion | Short and small most of the time; occasional sharp ones when a trend does not revert |
| Grid / averaging | Near-zero balance drawdown, equity dips that usually recover — and rare, deep ones when price does not come back |
| Martingale-sized grid | Like a grid, with the rare drawdowns much deeper because the late positions are the largest |
The pattern tells you which drawdown figure to worry about. For a trend follower it is duration; for a grid it is the depth of the rare event, which a short record may not contain at all. Grid trading drawdown explained shows how that depth is built.
Reading drawdown in a track record
- Find the maximum equity drawdown, and the date it happened.
- Ask what the market was doing then. A drawdown during a quiet period says the next violent one will be worse.
- Compare the return with the drawdown. A 30% annual return with a 40% drawdown is a different proposition from 15% with 8%.
- Check the length of the record: a short record has not met its worst case yet.
Go deeper
Each of these takes one part of this guide further.
Educational content, not financial advice. Trading gold and other leveraged products carries a high level of risk, including the possible loss of some or all of your capital. Automated strategies do not guarantee profit, and past or simulated performance is not indicative of future results. Risk disclosure.