The decline in account value from its peak to its lowest point before recovering.
Drawdown measures the percentage or dollar drop from your account’s highest point to its subsequent low. If your account grows to $12,000 and then drops to $9,600, you have a $2,400 or 20% drawdown. It resets only when your account reaches a new high.
Drawdown reveals the real pain of a strategy. A 50% drawdown requires a 100% gain to recover. Understanding drawdown helps you set realistic expectations and appropriate risk levels. Most professional traders aim to keep maximum drawdown below 10–20%.
Your account goes from $10,000 to $15,000 (new peak), then drops to $12,000. Your drawdown is $3,000 or 20% from the $15,000 peak, even though you’re still above your starting balance.
An equity curve showing a drawdown — the decline from peak to trough before recovering.