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What Is Drawdown? How to Measure and Survive Losing Streaks

Imagine you start a hiking trip at the top of a hill, walk down into a valley, then back up. The lowest point you reached compared to where you started — that depth is your drawdown.

In trading, drawdown measures how far your account has fallen from its highest point. It is not just about one bad trade. It captures the full extent of a losing streak before you start recovering.

Drawdown = (Peak Balance − Current Balance) / Peak Balance × 100%

A Simple Example​

DateAccount BalancePeak So FarDrawdown
Week 1$10,000$10,0000%
Week 2$11,500$11,5000%
Week 3$10,800$11,500−6.1%
Week 4$9,800$11,500−14.8%
Week 5$10,600$11,500−7.8%
Week 6$12,000$12,0000% (new peak)

The maximum drawdown here was −14.8%, at Week 4. Even though the account recovered and made new highs, that was the worst it got during this period.

Why Drawdown Math Is Unforgiving​

This is the part most traders underestimate. Losses and gains are not symmetric.

Drawdown SufferedGain Needed to Recover
10%11.1%
20%25%
30%42.9%
40%66.7%
50%100%
60%150%

A 50% drawdown means you need to double your account just to get back to where you were. That is why professional traders obsess over limiting drawdowns — not because they fear losses, but because they understand the math of recovery.

Drawdown vs a Single Loss​

A single loss is straightforward: you risked $100 and lost $100. Drawdown is different — it compounds across multiple trades.

If you lose 2% five times in a row, you are not down 10%. You are down 9.6% (compound losses reduce the base each time). Drawdown tracks this real compounding effect.

How Position Sizing Limits Drawdown​

The single most effective tool for controlling drawdown is risking a fixed small percentage per trade.

Risk Per Trade10 Consecutive Losses
10%−65% drawdown
5%−40% drawdown
2%−18% drawdown
1%−9.6% drawdown

At 2% risk per trade, even 10 losing trades in a row only draws your account down 18%. At 10% risk, the same 10 losses leave you at 35 cents on the dollar.

Maximum Drawdown as a Strategy Health Check​

Maximum drawdown is the largest peak-to-trough decline over a given period. It is the standard measure of how bad things got.

Experienced traders use it to evaluate their own performance:

  • If your strategy has a 30% max drawdown historically, you should be mentally and financially prepared to experience that again before dismissing the strategy.
  • If your actual drawdown starts exceeding your strategy's historical max drawdown, something has changed — either market conditions or your execution.

Drawdown Limits: When to Stop and Review​

Many professional traders set drawdown rules for themselves:

  • Daily drawdown limit: If I lose more than X% in one day, I stop trading for the day
  • Weekly drawdown limit: If I am down more than Y% on the week, I reduce size or stop
  • Max drawdown threshold: If I reach Z% drawdown on my account, I stop and review everything before risking more capital

These are not rules of weakness. They protect against the most destructive pattern in trading: doubling down during a losing streak in an attempt to recover quickly, which is how small drawdowns become catastrophic ones.