What Is Drawdown and Maximum Drawdown in Trading?
Ultimate Risk Management Guide
✅ What Is Drawdown?
Drawdown is the reduction of your trading account balance or equity from a peak to a trough during a losing period.
In simple terms:
👉 Drawdown shows how much your account has lost from its highest point.
📉 Example of Drawdown
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Account balance peak: $10,000
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Current equity: $9,000
👉 Drawdown = $1,000 or 10% drawdown
✅ Types of Drawdown
1️⃣ Equity Drawdown
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Measures floating losses (open trades)
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Reflects real-time risk
2️⃣ Balance Drawdown
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Measures closed trade losses
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Appears after trades are closed
✅ What Is Maximum Drawdown (Max DD)?
Maximum Drawdown (MDD) is the largest loss from a peak account value to the lowest point before a new high is reached.
👉 It represents the worst historical loss of your trading system or account.
📉 Example of Maximum Drawdown
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Peak balance: $20,000
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Lowest balance after losses: $12,000
👉 Maximum Drawdown = $8,000 or 40% MDD
📊 Why Drawdown Is Important in Trading
Drawdown is one of the most critical risk metrics because it shows:
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How risky a strategy is
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How much capital you can lose
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Psychological pressure on the trader
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Recovery difficulty
📉 Drawdown vs Maximum Drawdown
| Metric | Meaning | Use |
|---|---|---|
| Drawdown | Current loss from peak | Monitor ongoing risk |
| Maximum Drawdown | Worst historical loss | Evaluate strategy performance |
🧮 How to Calculate Drawdown
✅ Drawdown Formula
Drawdown (%) = (Peak Equity − Current Equity) / Peak Equity × 100
✅ Maximum Drawdown Formula
Max DD (%) = (Highest Peak − Lowest Valley) / Highest Peak × 100
⚠️ Why High Drawdown Is Dangerous
Large drawdowns require much higher returns to recover:
| Drawdown | Required Profit to Recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 50% | 100% |
| 80% | 400% |
👉 This is why professional traders keep drawdown low.
✅ Good Drawdown Levels in Trading
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0–10% → Very safe
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10–25% → Acceptable
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25–50% → High risk
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50%+ → Very dangerous
🛡️ How to Reduce Drawdown
✅ Use Proper Risk Management
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Risk 1–2% per trade
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Use stop loss always
✅ Diversify Strategies
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Multiple pairs and systems
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Avoid overtrading
✅ Control Leverage
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High leverage increases drawdown
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Lower leverage = more stable equity
✅ Follow a Trading Plan
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Avoid emotional trading
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Stick to tested strategies
