Glossary
Drawdown
The peak-to-trough decline in your account — how far you fall from a high before making a new one.
Drawdown, explained
Drawdown measures the drop from your account's highest equity point to its subsequent lowest point, usually expressed as a percentage. A peak of $12,000 falling to $9,600 is a 20% drawdown.
Recovering from drawdown is harder than the number suggests because gains compound from a smaller base. A 50% drawdown requires a 100% gain just to get back to even, and a 20% drawdown needs a 25% gain — which is why limiting losses matters more than chasing wins.
It helps to separate two senses of the word. Maximum drawdown is the worst peak-to-trough fall a track record has ever suffered, while current drawdown is how far below the most recent high you sit right now. The first measures historical pain; the second tells you whether you are in one today.
Maximum drawdown is the key risk statistic in any track record. A strategy with strong returns but brutal drawdowns is often untradeable in practice, because few people can sit through the equity pain without abandoning the plan at the worst moment — usually right before it would have recovered.
On the desk we care as much about the depth and shape of drawdowns as about returns. Fixed-percentage position sizing exists specifically to keep drawdowns shallow and survivable, so a losing run is a dip in the equity curve rather than an account-ending event.
Frequently asked questions
- Why is a 50% drawdown so dangerous?
- Because recovery is asymmetric: after losing 50% you need a 100% gain just to break even, since the gain compounds from a halved account. Deep drawdowns are far harder to climb out of than they look.
- What is the difference between maximum and current drawdown?
- Maximum drawdown is the largest peak-to-trough fall a track record has ever experienced; current drawdown is how far below your most recent equity high you are at this moment.
Related terms
Equity
Your account balance adjusted for the live profit or loss of all open positions.
ReadPosition Sizing
Deciding how large a trade to take so that a loss costs a fixed, pre-planned amount.
ReadExpectancy
The average amount you can expect to win or lose per trade over the long run.
ReadProfit Factor
Gross profit divided by gross loss — how many dollars you make for every dollar you lose.
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Vocabulary is the easy part. See how the desk turns these concepts into structured trades with defined risk on every position.