What is drawdown in trading?

Risk warning: CFDs are complex instruments with a high risk of losing money rapidly due to leverage. 70–80% of retail investor accounts lose money when trading CFDs. Risk disclosure · Past performance.

Drawdown is always measured relative to a high-water mark, the highest equity value the account has reached. As losses accumulate, equity drops below that mark and the gap between the two is the current drawdown. When equity makes a new high, the high-water mark resets and the drawdown returns to zero. Because it captures the depth of losing periods rather than the final outcome, drawdown describes the worst part of an account's journey, not just where it ended up.

Drawdown is calculated as the difference between a peak in account equity and the lowest point that follows it, before a new peak is made. As a percentage it is (peak minus trough) divided by peak; as a currency amount it is simply peak minus trough. The peak used is the high-water mark, the highest equity the account has reached up to that moment.

For example, if an account grows to a peak of 10,000 and then falls to 8,500 before recovering, the drawdown is 1,500 in currency terms, or 15 percent. The figure resets to zero only when equity climbs back above 10,000 and sets a new high-water mark.

Maximum drawdown is the largest peak-to-trough decline observed over a defined period, while current or relative drawdown is how far equity sits below its most recent peak at this moment. Maximum drawdown is a worst-case, historical figure; current drawdown is a live, moving number.

These two views answer different questions. Maximum drawdown asks how bad things have ever been, which helps in judging how much pain a strategy can produce. Current drawdown asks how far underwater the account is right now, which matters for day-to-day risk decisions and for staying within any limits a trader or firm imposes.

• Maximum drawdown: the deepest historical fall from peak to trough over the period
• Current (relative) drawdown: the live gap between equity and its latest peak
• Both are usually quoted as a percentage of the peak, sometimes as a currency amount

Proprietary trading firms commonly translate drawdown into hard rules, typically a daily drawdown limit and an overall (maximum) drawdown limit. The daily limit caps how much equity may fall within a single trading day, while the overall limit caps the total decline allowed from the starting balance or high-water mark across the whole account.

Breaching either cap usually ends the evaluation or closes the funded account, so traders watch both numbers closely. The exact thresholds, how they are measured, and whether they track balance or equity differ by firm and by whether an account is in the evaluation or funded stage. Each firm publishes its own rules, and they should be read carefully before trading.

Drawdown matters because it describes the depth of losing periods, which determines whether an account can survive long enough to keep trading. A final return tells you the destination, but drawdown tells you how rough the road was, including the moments a trader is most tempted to abandon a plan.

Recovery from drawdown is also asymmetric: the deeper the fall, the disproportionately larger gain needed to get back to even. A 20 percent drawdown requires a 25 percent gain to recover, and a 50 percent drawdown requires a 100 percent gain. This is why controlling drawdown is often treated as more important than chasing the highest possible return.

Risk controls help by limiting how much any single trade or cluster of trades can contribute to a decline, which keeps drawdown inside the caps a trader or firm has set. Common tools include percent-risk position sizing, fixed stop-losses, a cap on the number of simultaneous open trades, and symbol filters that exclude unwanted instruments.

Where these checks run matters. Some execution platforms enforce risk rules server-side, before an order reaches the broker, so the limits apply even if the trader's own computer is offline. PipSync is one example of a cloud execution layer that applies percent-risk sizing and a max-open-trades cap on the server; such controls can help a trader stay within drawdown limits, but they do not remove market risk or guarantee any outcome.