Trading Drawdown
Understand peak-to-trough account declines, recovery mathematics and why controlling drawdown matters.
What drawdown means
Drawdown is the decline from an account or strategy's previous equity peak to a subsequent low. It describes the depth of a losing period rather than the loss on a single trade.
A 10% loss requires an 11.1% gain to recover. A 25% loss requires 33.3%. A 50% loss requires 100%.
Why this matters
As drawdowns deepen, the percentage gain needed to return to the prior peak grows faster. That is one reason risk control focuses on avoiding catastrophic losses rather than maximizing exposure on every opportunity.
Strategy drawdown versus trader drawdown
A strategy can experience a statistically normal losing period even when executed correctly. A trader can also create additional drawdown through rule violations, oversized positions or emotional decisions. Journaling helps separate these causes.
Drawdown policy
Some trading plans reduce size, pause live trading or require review after predefined drawdown thresholds. The threshold itself is personal; the valuable part is deciding the response before a drawdown creates pressure.