Definition
A drawdown is the decline of an account from a peak to a following low, usually expressed as a percentage of the peak. If an account grows from 10,000 to 12,000 and then falls to 10,200, the drawdown is 1,800, or 15 percent of the peak. The maximum drawdown is the largest such decline over the whole period measured.
Two more things matter: how long the drawdown lasted, from the peak to the recovery of that peak, and how often drawdowns of that depth happen.
Recovery is not symmetric
To recover a loss, you need a larger percentage gain than the percentage you lost. After a 10 percent loss you need 11.1 percent. After 20 percent you need 25 percent, after a loss of one third you need 50 percent, and after 50 percent you need 100 percent.
This is the reason many risk rules aim to keep drawdowns shallow. Deep drawdowns are expensive twice: they cost money, and they require disproportionate performance to repair.
Drawdown depends on risk per trade
Two traders can run the same strategy and experience very different drawdowns, because the drawdown scales with the percentage risked on each trade. A series of ten losses costs about 4.9 percent at 0.5 percent risk per trade, and about 18.3 percent at 2 percent.
The worst drawdown is probably still ahead
The maximum drawdown of a backtest is the worst one that happened in that particular history. A longer history or a different order of the same trades would likely have produced a deeper one. As the number of trades grows, new lows become possible.
This is why a Monte Carlo simulation is useful: by reordering the same trades thousands of times, it shows the range of drawdowns the strategy could have produced, and the deeper cases that did not occur in the original run.
Plan for it before it happens
Decide in advance what drawdown you can tolerate, and size your trades so that a realistic bad period stays below it. Writing down limits, such as a maximum daily loss, makes the decision while you are calm instead of while you are losing. Keeping a journal helps you see whether a drawdown comes from the strategy or from deviations from it.
Frequently asked questions
What is a normal drawdown?
It depends on the strategy and on the risk per trade. A positive-expectancy strategy can still show long and deep drawdowns, so the figure to compare is the drawdown against your own tolerance, not against a universal number.
Is maximum drawdown a limit?
No. It is the worst decline observed so far. A deeper one can still happen.
See it in ATLAS
Future Simulation
Thousands of possible futures for a strategy, so you see the drawdowns you would have to live with.
Trading Journal
Record your trades, review them on the chart and get an AI diagnosis of your habits.
Strategy Lab
Describe a strategy in plain words or paste a Pine Script; ATLAS turns it into rules and measures it.
Terms used in this guide
Drawdown, Maximum drawdown, Risk of ruin, Position sizing, Monte Carlo simulation.
More guides
This guide explains methods and arithmetic. It is not financial advice, and past results do not guarantee future ones. Read the risk disclosure.
