Maximum Drawdown: The Worst Fall From a Peak in Your Account

Your starting balance is the wrong reference point. An account that began at $50,000 and now sits at $46,400 looks like it is down $3,600, a loss of 7.2%, and on a statement that compares this month with the opening deposit, that is what you will see. In between, it reached $58,000. From there the fall is $11,600. A drawdown measures that larger number, because it is money you had and lost.

The worked example

Twenty percent is the honest figure. Gains count as yours once they are in the account. Giving them back is a loss.

Why “maximum”

An account can have many drawdowns. Say that on the way to $58,000 it rose to $53,000 and dipped to $50,350. That dip was a 5% drawdown: $2,650 from a $53,000 high. It ended at the next new high. The maximum is the deepest fall in the record, here the 20% one, and it stays the maximum until something worse replaces it, which could be next month or never, depending on how the account is run and what the market does.

That also means maximum drawdown depends on how often you look. Month-end statements can miss a deeper fall that happened and recovered mid-month. Daily values catch more.

Finding it on a statement

A brokerage statement usually has no drawdown line. What it shows is the account value at the start and end of the period, a change-in-value figure measured from the start, and often a performance chart covering the year so far. The change figure is the misleading one here, since it resets every period. To see a drawdown you need the running high, and the chart or a list of period-end values is where you find it.

Margin makes the number bigger. An account at 2.0x leverage that sees its holdings fall 10% from their high takes a 20% drawdown in equity, before interest.

Getting back to the peak

A 20% drop takes a 25% gain to undo. The recovery works on a smaller base. The gap widens fast: a 50% drawdown needs 100%. A 50% loss needs a 100% gain argues that the recovery arithmetic should shape how large you let a drawdown get, and the loss recovery calculator gives the figure for any depth.

Drawdown in time

The percentage tells you how deep. It says nothing about how long. Drawdown duration is the time from a peak until the account makes a new high, and the duration can be the harder part to live through, since every gain made during a long recovery only takes you back to where you were, and months of that can wear down your judgment while you wait.

Duration keeps running until the old high is beaten. Reaching $46,400 was the bottom. The clock stops only above $58,000.

How prop firms define it

Prop firms use drawdown as a hard limit. Each writes its own definition. Some measure a fixed distance from the starting balance, called a static drawdown. Others trail the highest balance or equity reached, sometimes intraday. That is closer to the peak-based measure above. Some add a daily cap.

What people get wrong

Measuring from the starting balance is the classic error. It makes a bad stretch look mild. Another is ignoring withdrawals and deposits: add $10,000 of fresh cash at the trough and the account value recovers without any trading gain at all, so calculate drawdown on performance, with cash flows taken out. A third is setting a drawdown limit after the fact. How big a drawdown should make you stop trading covers setting one in advance, and the lessons in the risk management section put it into a written plan.

Related terms

Static drawdown is a prop firm limit fixed to the starting balance. Loss recovery is the gain needed to return to a prior level. Volatility describes how much values swing, while maximum drawdown records the single worst fall.