How trading drawdown works

The measurement

Track your running balance or equity. Every time it makes a new high, that becomes the high-water mark. Drawdown at any moment is (high-water mark − current value) ÷ high-water mark, expressed as a percentage. Maximum drawdown is the largest such value over the period.

Example: balance runs 10,000 → 11,500 → 9,800 → 12,000. The high-water mark reached 11,500 before the fall to 9,800, so maximum drawdown is (11,500 − 9,800) ÷ 11,500 = 14.8%. The later high of 12,000 does not erase it.

Closed-trade drawdown vs equity drawdown

Closed-trade drawdown uses only realised results, so it ignores how far an open position travelled against you. Equity drawdown includes floating profit and loss and is usually deeper.

Both are legitimate; they answer different questions. If you hold positions through adverse excursions, equity drawdown is the honest measure of what you actually sat through — and it is the one most prop-firm rules are written against.

Recovery is asymmetric

A 20% drawdown needs a 25% gain to get back to the high-water mark. A 33% drawdown needs 50%. A 50% drawdown needs 100%. The arithmetic is unforgiving, which is why risk per trade dominates most other decisions.

This is also why average results can hide a fatal problem: a strategy with a good long-run average and a drawdown deeper than your tolerance will be abandoned at the worst possible moment.

What to do with the number

Compare your maximum drawdown to your own limit before you compare it to anyone else's. Then look at what happened during it: did risk per trade rise, did trade frequency spike, did the losses cluster in one session or one symbol?

• Write a maximum daily loss and maximum risk per trade into your rules.
• Check whether size increased during drawdown periods.
• Look at drawdown alongside trade count — deep and fast is a different problem from shallow and slow.