Drawdown

What drawdown means

Drawdown is the decline in an account or portfolio from a peak value to a later low, normally expressed as a percentage of the peak. If your account grows to 12,000 and then falls to 9,000 before recovering, the drawdown was 25 percent. Maximum drawdown is the largest such fall over a chosen period, and it is the number most often quoted when people judge how rough a strategy has been.

Drawdown is used by individual traders reviewing their own results, by fund managers reporting to investors, and by platforms that show strategy statistics for copy trading and signal services. It sits alongside return: return tells you how much was gained, drawdown tells you how uncomfortable the path was.

A drawdown starts at a peak, continues to a trough and ends only when the account reaches a new peak. The time spent below the old peak is called the drawdown duration or recovery time.

How it works

The calculation is straightforward.

1. Track the highest value reached so far, called the running peak.
2. At each point, compute the fall from that peak: (peak - current value) / peak.
3. The largest of these values over the period is the maximum drawdown.
4. The time from the peak until a new peak is reached is the recovery period.

There are different versions. Absolute drawdown measures the fall below the starting balance. Relative drawdown measures the percentage fall from the running peak. Some platforms measure on closed trades (balance drawdown) and others include open positions (equity drawdown), and the equity version is usually larger because it captures floating losses.

An important property is that recovery requires a bigger percentage gain than the loss. A fall of 50 percent needs a gain of 100 percent to return to the peak, because the account is half its former size.

A worked example

These numbers are illustrative. An account moves as follows.

• Start: 10,000
• Peak: 14,000
• Trough: 10,500
• New peak: 15,000

Drawdown from the 14,000 peak to the 10,500 trough:

• Loss: 14,000 - 10,500 = 3,500
• Percentage: 3,500 / 14,000 = 25 percent

Gain needed to recover from the trough to the old peak:

• 14,000 / 10,500 - 1 = 33.3 percent

Compare a deeper case. If the account fell 50 percent, from 14,000 to 7,000, the required gain is 14,000 / 7,000 - 1 = 100 percent. The link between loss and required recovery is not linear, which is why limiting deep drawdowns matters so much for compounding.

Why it matters

Drawdown measures pain and survival. A strategy can show a high average return yet have a drawdown so large that most people would abandon it or be forced out by margin calls before it recovered. Knowing the historical maximum drawdown helps you size positions to a level you can live with.

It also helps compare strategies. Two systems with the same return but different drawdowns offer different experiences. Ratios such as the Calmar ratio divide return by maximum drawdown to express this.

For leveraged traders, a large drawdown can trigger margin calls or stop-outs, ending the account before any recovery. Realistic drawdown expectations are therefore part of risk planning.

How to use it in practice

1. Record equity, not just closed-trade balance, at regular intervals.
2. Calculate maximum drawdown and its duration for your own results.
3. Set a personal drawdown limit and a plan for what to do if it is reached, for example reducing size or pausing.
4. When assessing a copy-trading profile or fund, look at drawdown next to return and the time period covered.
5. Expect future drawdowns to exceed historical ones, since the worst period may not have occurred yet.
6. Match risk per trade to your tolerance, using position sizing.
7. Check whether the quoted drawdown is on balance or equity.

Common mistakes and misconceptions

• Looking only at returns. A high return with a huge drawdown may be unsustainable.
• Assuming the past maximum is the worst possible. A longer sample usually shows deeper falls.
• Ignoring recovery math, so that a 50 percent loss feels like it needs a 50 percent gain.
• Comparing drawdowns over different time periods and instruments without care.
• Confusing a stop-loss on one trade with drawdown on the account.
• Treating a short track record with a small drawdown as proof of low risk.

Risks and limitations

Drawdown describes the past and depends on the sample period and the data frequency. Daily data can hide intraday swings. It does not measure how fast a fall occurred or the chance of a future fall. Leverage can cause drawdowns to exceed the money you deposited with some products and in some jurisdictions, though many regulated retail clients have protection against negative balances.

How Brokeli looks at it

Brokeli cares about drawdown when a platform publishes it, such as for copy-trading or managed offerings, and we look at whether the figure is based on equity or balance and how long the period is. We treat any performance statistic as descriptive, not as a forecast, and we do not rank products on returns alone.