Drawdown

The decline from an account’s peak value to its lowest point before a new peak.

Also called: dd · equity drawdown

In plain language

Drawdown measures the depth of the hole, not the daily fluctuation. It is always calculated from the highest equity value reached so far.

The recovery math is asymmetric and unforgiving. A 20% drawdown needs a 25% gain to recover. A 50% drawdown needs 100%. An 80% drawdown needs 400%.

Drawdowns are unavoidable — every strategy has them. What is controllable is their depth, and depth is set by position size far more than by trade selection.

The formula

Drawdown

(Peak Equity − Current Equity) ÷ Peak Equity × 100

Gain needed to recover: Drawdown ÷ (100 − Drawdown) × 100

Worked through

What it takes to climb back out, at four depths

Down 10%: needs +11.1%
Down 25%: needs +33.3%
Down 50%: needs +100%
Down 75%: needs +300%

The gap between the two columns is the whole point. Losing and recovering are not symmetrical, because the loss is taken on the full account and the recovery has to be earned on what is left of it.

At 10% down it barely matters — 11.1% instead of 10% is a rounding error in a trader’s year. At 50% the account must double, which for most strategies is not a bad quarter but a good couple of years. The curve is gentle and then it is not, and the steep part arrives faster than intuition expects.

This is the mathematical case for small, boring position sizes, and it does not depend on being cautious by temperament. A trader who never lets a drawdown past 15% is always within a normal winning stretch of a new high. One who reaches 50% has turned a trading problem into an arithmetic one.

It also explains why sizing up inside a drawdown is the most expensive instinct in trading. It is applied precisely when the account can least afford the variance, and it moves you along the curve in the direction where every further step costs more than the last.

Change the numbers

This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.

Try it yourself

Peak Equity

Current Equity

Drawdown: 20%
Amount Lost: $2,000
Gain Needed To Recover: 25%

Losing 20% requires a 25% gain to get back to even. The deeper the hole, the more the math works against you.

See what one trade puts at risk

Seen on a chart

Losing 50% requires a 100% gain to return to even. Recovery is always harder than the loss that caused it.

Why it matters

Because recovery is non-linear, avoiding a deep drawdown is worth far more than a slightly better entry. Small consistent risk is what keeps the hole shallow.

Common mistakes

Measuring drawdown from the starting balance rather than from the equity peak.
Increasing size during a drawdown to recover faster, which deepens it.
Underestimating the psychological difficulty of trading normally while 25% down.