Drawdown in Trading: What It Is and How to Recover From It
Drawdown in trading explained: peak to trough, maximum and relative drawdown, the recovery maths, normal ranges by risk, and a plan for getting back.
Sooner or later every trader watches the account slide from its high and wonders whether something is broken. That slide is a drawdown, and drawdown trading means measuring it and setting rules for it before it happens.
Quick answer: A drawdown is the fall in your account from its highest point (the peak) to its lowest point (the trough) before a new high, usually shown as a percentage. Drawdowns are normal, but recovery is harder than loss: −20% needs +25%. You recover by cutting risk, checking your journal and letting a tested method work, never by trading bigger.
What is a drawdown in trading?
A drawdown measures how far your account has fallen from its most recent peak. It is always measured from the high, not from the money you deposited. If you deposit $10,000, grow it to $11,000 and then fall back to $9,900, you are only 1% below your deposit, but you are in a 10% drawdown: $1,100 lost from a peak of $11,000.
Every drawdown has the same three parts:
- The peak: the highest value the account reached before the fall.
- The trough: the lowest point before the account starts climbing back.
- The recovery: the climb from the trough back to the old peak. The drawdown is only over when the account makes a new high.
The time between the peak and the new high is often called time under water. Traders tend to focus on the depth of a drawdown, but the length is what wears people down. A 10% fall that recovers in two weeks feels very different from a 10% fall that takes five months to repair.
Your balance only changes when trades close. Your equity includes the running profit or loss on open trades. An equity drawdown can be deeper than the balance shows, because a trade that was 3% down before it recovered never appears in the balance history at all. If you hold trades through big swings, watch equity, not balance; that is the money you would actually have if you closed everything now.
Maximum, relative and absolute drawdown
Most platforms and backtest reports give you more than one drawdown figure, and they are easy to confuse. The headline number is maximum drawdown: the largest peak-to-trough fall over the whole period. It describes how painful a method was to trade, which the final profit figure hides completely.
Reports such as MetaTrader’s strategy tester usually split it into three measures:
- Absolute drawdown: how far the account fell below the starting deposit. It ignores any peak above the deposit, so it says little once an account has grown.
- Maximal drawdown: the largest peak-to-trough fall measured in money.
- Relative drawdown: the largest peak-to-trough fall measured as a percentage.
The last two usually come from the same episode, but not always. A fall early on, from a smaller peak, can be the bigger percentage, while a fall later, from a higher peak, is the bigger amount of money. The chart below shows exactly that.
For your own trading, the percentage figure is the one to track, because it compares fairly across account sizes and across time. Two other numbers are worth noting from any report or journal: the longest time under water, and the longest losing streak. Together with the maximum drawdown, they tell you what living with the method will feel like.
Maximum drawdown records the past. The longer a method runs, the more chances it has to string together a bad patch. In our own simulation of a method that wins 40% of its trades at 2:1, risking 1% per trade, the typical worst drawdown was about 12% over 200 trades but about 16% over 500 trades. Same method, same rules; more trades means more room for an unlucky run. If a backtest of a year shows a 15% maximum drawdown, plan for something deeper live.
The recovery maths: why losses outweigh gains
You recover from a loss by growing a smaller balance, so the percentage gain you need is always larger than the percentage you lost:
Gain needed = 1 ÷ (1 − drawdown) − 1
On a $10,000 account, it looks like this:
| Drawdown | Balance at the trough | Gain needed to get back |
|---|---|---|
| −5% | $9,500 | +5.3% |
| −10% | $9,000 | +11.1% |
| −15% | $8,500 | +17.6% |
| −20% | $8,000 | +25% |
| −25% | $7,500 | +33.3% |
| −30% | $7,000 | +42.9% |
| −40% | $6,000 | +66.7% |
| −50% | $5,000 | +100% |
| −60% | $4,000 | +150% |
| −75% | $2,500 | +300% |
Up to about −15% the gap is small: you need a little more than you lost. Beyond −25% it widens fast, and past −50% the gain needed exceeds anything most methods produce in years. The curve below shows the same thing as a shape.
The gain needed to recover from each drawdown. It stays close to the loss for small drawdowns, then bends sharply upward: −10% needs +11%, −50% needs +100%, −75% needs +300%.
The percentages are only half of the problem. The other half is time. A method with a modest edge grows slowly, so a deep hole takes many trades to climb out of. Take a method that wins 40% of its trades with a 2:1 risk-reward ratio, risking 1% per trade. Its expectancy is +0.2R per trade, which compounds to roughly 0.19% growth per trade on average, before costs. Here is how long, on average, it takes to climb back from each drawdown.
For someone taking five trades a week, a 10% drawdown is a few months of patient work. A 50% drawdown is well over a year, and that assumes the method keeps its edge and you keep your nerve the whole way. Trading costs lengthen every bar. This is why the Academy lesson on the maths of drawdowns argues that your first job is not to recover from deep drawdowns but to avoid them.
How big will your drawdowns be? Streaks and simulations
Drawdowns come mostly from losing streaks, and losing streaks come from plain chance. Even a method with a genuine edge will produce runs of losses that look like proof it has stopped working. The probabilities are worth seeing, because they are higher than intuition suggests.
A streak converts into a drawdown through your risk per trade. Eight losses in a row cost about 3.9% at 0.5% risk, 7.7% at 1%, 14.9% at 2% and 33.7% at 5%. The streak is the same in every case; the setting you chose decides whether it is a dent or a disaster.
Real drawdowns are rarely one clean streak, though. They are clusters of losses with the odd winner in between. To see the full picture, we ran 100,000 simulated paths of 200 trades for the same 40% win rate, 2:1 method at five risk levels, and recorded the worst drawdown in each path.
Three things stand out. First, even at 1% risk a 12% drawdown is ordinary, and one path in four had a worst drawdown of 15% or more. If you would abandon the method at −10%, you will abandon a working method. Second, the worst cases scale roughly with risk: in these runs, at 1–2% risk, the 1-in-20 drawdown was close to 20 times the risk per trade. Third, at 5% risk the typical path loses half the account at some point, which on the recovery table means needing +100% just to get back. A profitable method can still ruin a trader who sizes it like that.
You do not have to take our word for it. Run the simulator below a few times at 2% risk, then drop it to 1% and compare the worst drawdown figure.
Each run uses the same settings with different luck. Run it several times: the shape changes, the drawdowns don't go away.
The practical use of all this is to choose risk from the drawdown you can tolerate, not from the profit you hope for. Decide the deepest fall you could sit through without changing your rules, then pick the risk whose bad-luck case stays inside it. For most people that lands at 1% or below, which is why the lesson on risk per trade and our guide to the 1% rule in trading start there.
Drawdown rules: what to do at −5%, −10% and −20%
The worst time to decide how to handle a drawdown is during one. Write your drawdown rules into your trading plan while you are calm, as a ladder of levels measured from your equity peak, each with a fixed action.
The most common rule, and the one used in our forex risk management guide, is to halve your risk per trade at a 10% drawdown and restore it only when the account makes a new high. It sounds conservative, so we tested it. In the same simulation, at 1% risk over 500 trades, the rule cut the 1-in-20 worst drawdown from about 25% to about 18%. At 2% risk it cut it from about 45% to about 30%.
The rule has a cost, and you should know it before you adopt it. Half the risk means roughly half the growth per trade, so recovery from the point where you cut takes about twice as many trades. In good periods, you also earn a little less. You trade slower recovery for a shallower worst case. We think that is a good exchange, especially in your first few hundred trades, because a deep drawdown is the kind that ends trading careers.
Sizing every trade as a fixed percentage of the current balance already slows the damage. After a 10% fall, 1% of the account is 10% smaller in money, without you deciding anything. Our guide to position sizing in forex shows the calculation. A drawdown rule adds a deliberate step on top.
Two other levels belong in the plan. A daily loss limit stops one bad session from becoming a bad month. And a hard floor, such as −20% from the peak, sends you back to a demo account to work out whether the method, the market or your behaviour has changed, before any more real money is involved. The lesson on writing a trading plan walks through each field.
How to recover from a drawdown, step by step
To recover from a drawdown of any size, follow these steps in order.
- Stop and measure. Write down the peak, the current equity and the percentage drawdown. Compare it with the range you expected from your backtest or a simulation like the one above. A 9% drawdown at 1% risk is inside the normal range; a 30% one is not.
- Sort the losses. Go through your trading journal and split the losing trades into two piles: trades that followed the plan, and trades that broke it. Plan-followed losses are the cost of the method. Rule-broken losses are a behaviour problem.
- Name the cause. Normal variance, broken rules, or a genuine change in the market? Each needs a different fix. The lesson on handling losing streaks has a short test for telling them apart.
- Cut size, never raise it. Apply your drawdown rule. A smaller size protects the account and, just as important, lowers the emotional stakes on each trade.
- Trade less, not more. Take only the setups your plan defines, at your usual times. A drawdown is not the moment to try new pairs or new ideas.
- Measure the process. Track how many trades you took exactly by the plan, and your results in R, rather than staring at the distance to the old peak.
- Restore size by your rule. Back to full risk at a new equity high, not at the first good week.
If the journal shows the method itself has stopped working, for instance the win rate over the last 100 plan-followed trades is far below what you tested, or the drawdown is well beyond your expected 1-in-20 range, pause live trading. Re-test on demo before risking more. Our guide to trading expectancy shows how to check whether a method still has an edge.
Keep this list somewhere you will see it when the next drawdown arrives.
Drawdown recovery checklist
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Now try the decision that trips up most traders in the middle of a drawdown.
What would you do?
Your account is 12% below its peak after three weeks of losses. Your journal shows nine of the last fourteen trades lost; two of those broke your rules. Tonight a setup appears that looks perfect. What do you do?
The psychology of a drawdown
The numbers explain what a drawdown is. They do not explain why drawdowns cause so much damage beyond the money lost. That comes from how people respond to losses.
Research on loss aversion by Kahneman and Tversky suggests that a loss feels roughly twice as painful as an equal gain feels good. In a drawdown, that pain arrives every day you look at the account, and the brain looks for the quickest way to make it stop. Our guide to loss aversion in trading covers the research; here are the four reactions it tends to produce.
- Anchoring to the peak. The old high becomes the only number that matters. Every trade is judged by whether it gets you back there, which makes small, sensible wins feel worthless.
- Trading to win it back. Bigger positions, extra trades, setups outside the plan. This is revenge trading, and it is the single fastest way to turn a 10% drawdown into a 30% one. Our guide to revenge trading explains the warning signs.
- Freezing. The opposite reaction: skipping valid setups because the last few lost. Skipping at random removes winners as well as losers, and for a method that wins 40% of the time, the handful of winners that end a drawdown are exactly the trades you cannot afford to miss.
- Tinkering. Changing the indicator, the timeframe or the pair after every loss. Each change resets your evidence to zero, so you never find out whether anything works.
A few habits make these reactions easier to resist. Keep score in R and in plan-followed trades rather than in money; hiding the balance during the session helps some traders a lot. Decide your drawdown rules in advance, so the decision in the moment is only whether to follow them. Review your journal weekly, not after every loss. And if a drawdown starts to affect your sleep, your mood or money you need for other things, step away for longer than feels necessary. Our guides to trading psychology and handling a losing streak go further.
It also helps to remember that a drawdown is not a verdict on you. When the European Securities and Markets Authority restricted leverage on retail CFDs in 2018, it cited evidence that 74–89% of retail accounts lost money (ESMA). Oversized positions, and the deep drawdowns they produce, are a large part of that picture. Keeping your drawdowns shallow and survivable already puts you on the other side of the most common mistake.
Common drawdown mistakes
Doubling up to get back faster
Raising risk after losses feels logical: bigger trades, faster recovery. In practice it puts the most money at stake at the moment your method is struggling and your judgement is weakest. As the worked example shows, six more losses at doubled risk turn a 10% drawdown into a 20% one. Size goes down in a drawdown, never up.
Measuring from the deposit instead of the peak
“I’m still above my starting balance” is a way of hiding a drawdown from yourself. Profits that you made and then gave back are real losses. Measure every drawdown from the highest equity the account reached, and apply your rules to that number.
Judging a method on one drawdown
A 10–15% drawdown at 1% risk is ordinary for many methods, as the simulation showed. Changing strategy at the bottom of a normal drawdown means you will change it at the bottom of every drawdown, and you will never collect the hundreds of trades needed to know whether anything works. Judge methods on large samples; judge drawdowns against the range you expected.
Ignoring open-trade drawdown
A balance curve that only updates on closed trades can look smooth while equity swings wildly underneath. If you hold losing trades open for a long time, your real drawdown is deeper than your balance history says. Track equity, and keep a stop on every trade.
Treating a backtest’s maximum drawdown as the limit
A backtest shows the worst fall that did happen in one sample, not the worst that can. Longer records and live conditions, with costs and the odd mistake, usually produce something deeper. Set your rules with headroom beyond the backtest figure.
Frequently asked questions
What is a good drawdown in trading?
There is no single good number, because drawdown depends on risk per trade and win rate. In our own simulation of a method that wins 40% of its trades at 2:1, risking 1% per trade, the typical worst drawdown was about 12% over 200 trades and about 16% over 500, so planning for up to about 20% at 1% risk leaves room for normal losing streaks. A drawdown you can sit through without changing your rules is a better test than any fixed figure.
How long does it take to recover from a drawdown?
It depends on the depth of the drawdown and on your method's edge. For a method winning 40% of trades at 2:1 with 1% risk, a 10% drawdown takes about 56 trades on average to recover before costs, and a 20% drawdown about 118. Deep drawdowns take disproportionately longer, which is why keeping them shallow matters so much.
What is the difference between a drawdown and a loss?
A loss is the result of one trade. A drawdown is the overall fall in your account from its highest point to a low, which can include many trades, some of them winners. You can be in a drawdown while still above your deposit, because a drawdown is always measured from the peak, not from the money you started with.
Is a 20% drawdown bad?
It is serious but recoverable: a 20% drawdown needs a 25% gain to get back to the peak. At 1% risk per trade it is uncommon but possible over a few hundred trades; at 3% or more it is routine. If you hit 20%, stop live trading, review your journal and method, and return at reduced size only once you know the cause.
Should I stop trading during a drawdown?
Not automatically. If the losses came from valid, plan-followed trades and the drawdown is within your method's normal range, keep trading at the reduced size your rules set. Pause if you are breaking rules, if the drawdown passes the limit in your plan, or if the method's results have clearly changed. Decide these levels in advance.
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