A drawdown starts when your account falls below its previous high and ends when it makes a new high. Its depth is measured from that peak to the lowest point in between. Every strategy has drawdowns; what matters is how deep and how long they get compared with what you can tolerate, financially and emotionally.
Example
Your account grows from $10,000 to $12,500, then falls to $10,625 before recovering. The drawdown is ($12,500 − $10,625) ÷ $12,500 = 15%. To get back to the peak you need $1,875 ÷ $10,625 ≈ 17.6%, more than the 15% you lost, because the gain applies to a smaller balance.
Why it matters
Losses and recoveries are not symmetric: a 20% drawdown needs a 25% gain to recover, and a 50% drawdown needs 100%. Controlling drawdowns through position size and loss limits is what keeps a trader in the game long enough for an edge to show.
Common mistake
Raising risk per trade to win it back during a drawdown. Trading bigger at the moment your confidence and judgment are weakest is how a normal drawdown becomes a deep one. Many traders cut their risk in a drawdown instead.
Put it into practice
- Free toolDrawdown recovery & compounding calculatorSee the gain you need to recover from any drawdown, how many losses in a row get you there, and how a steady return compounds over time.
- In FlowsenseAnalyticsWin rate, expectancy, profit factor and drawdown from your own trades, broken down by setup, session and hold time.
FAQ
- How much do I need to gain to recover from a drawdown?
- Gain needed = drawdown ÷ (1 − drawdown). A 10% drawdown needs 11.1%, 25% needs 33.3% and 50% needs 100%.
- What is a normal drawdown for a trader?
- It depends on risk per trade and win rate. At 1% risk, 10 losses in a row cost about 9.6%, and streaks like that are normal for strategies that win less than half the time. At 3% risk, the same streak costs about 26%.
- Is drawdown measured on balance or equity?
- Both are used. Balance drawdown only counts closed trades; equity drawdown includes open positions and is what most prop firms measure.