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Risk ManagementInteractive

Drawdown

The decline from an account’s peak value to its lowest point before a new peak.

Also called: dd · equity drawdown

In plain language

Drawdown measures the depth of the hole, not the daily fluctuation. It is always calculated from the highest equity value reached so far.

The recovery math is asymmetric and unforgiving. A 20% drawdown needs a 25% gain to recover. A 50% drawdown needs 100%. An 80% drawdown needs 400%.

Drawdowns are unavoidable — every strategy has them. What is controllable is their depth, and depth is set by position size far more than by trade selection.

The formula

Drawdown

(Peak Equity − Current Equity) ÷ Peak Equity × 100

Gain needed to recover
Drawdown ÷ (100 − Drawdown) × 100

Change the numbers

This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.

Try it yourself
Drawdown
20%
Amount Lost
$2,000
Gain Needed To Recover
25%

Losing 20% requires a 25% gain to get back to even. The deeper the hole, the more the math works against you.

See what one trade puts at risk

Seen on a chart

An equity curve falling from its peak, and the larger gain required to recoverPEAKTROUGH−50%loss 50%recovery 100%
Losing 50% requires a 100% gain to return to even. Recovery is always harder than the loss that caused it.

Why it matters

Because recovery is non-linear, avoiding a deep drawdown is worth far more than a slightly better entry. Small consistent risk is what keeps the hole shallow.

Common mistakes

  • Measuring drawdown from the starting balance rather than from the equity peak.
  • Increasing size during a drawdown to recover faster, which deepens it.
  • Underestimating the psychological difficulty of trading normally while 25% down.

Put it to work

See what a drawdown costs to recover

Keep exploring

These concepts are connected. Understanding one usually makes the next one easier.

Maximum DrawdownRisk Management

The largest peak-to-trough decline an account or strategy has ever experienced.

Risk Per TradeRisk Management

The fixed share of your account you are willing to lose on any single trade.

Position SizeRisk Management

The amount of an asset you buy or sell in a single trade.

Risk of RuinRisk Management

The probability that a series of losses reduces an account below the point of recovery.

CompoundingRisk Management

Growth applied to a balance that already includes previous growth.