Drawdown
Definition
Drawdown is the decline of the deposit from its peak value, expressed in percent or money. It is the difference between the account's best balance and its current one, and the main gauge of capital health: how deep the account has fallen after a run of losses.
What a drawdown is
Drawdown shows how far the account has dropped from its peak. If the deposit grew to $130 and then, after a run of losses, fell to $104, the drawdown is $26, or 20% off the peak. The count always runs from the best balance reached, not from the starting deposit — which is why even an overall-profitable account has drawdowns.
Small drawdowns are a normal part of trading: a run of losses arrives even with a good strategy. What is dangerous is not the drawdown itself but its depth and how the trader reacts to it. That is why drawdown is treated as a key metric of money management, rather than martingale or the size of a single win.
The math of recovery
The main trap of a drawdown is its asymmetry. To return to the prior level you must earn a larger percent than the drawdown itself:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | +11% |
| 20% | +25% |
| 30% | +43% |
| 50% | +100% |
| 70% | +233% |
The logic is simple: after a 50% loss you have half left, and to double it back you need +100%. Hence the rule: a deep drawdown is far more important to prevent than to heroically claw back — the cost of recovery grows faster than the drawdown.
Drawdown — how it differs from a loss
A loss and a drawdown are not the same. A loss is the result of a single losing trade. A drawdown is the accumulated decline of the whole account from its peak — the sum of a prolonged run of losses. One losing trade is just a minus, while ten in a row create a drawdown you have to recover under the asymmetric math above. A loss is measured per trade, a drawdown across the account as a whole.
Frequently asked questions
What drawdown counts as normal?
It depends on the approach, but a reference for disciplined trading is drawdowns within 10–20% of the deposit. Deeper than 30% is a warning sign: it is psychologically hard, and mathematically harder to recover, because the gain needed to climb back is larger than the drawdown itself.
Why is a drawdown hard to recover?
Because of the asymmetry of percentages. A 20% loss needs not +20% but +25% on the remainder to return to the prior level; a 50% loss needs +100%. The deeper the drawdown, the disproportionately more you must earn to get back — so it matters more to avoid it than to claw it back later.
How do you control drawdown?
Limit the trade amount (a small percent of the deposit), set a daily loss cap, and never grow sizes into a loss without a hard ceiling. Money management — a series-length limit in martingale, a fixed bank in Masaniello — exists precisely to keep the drawdown manageable.