Trading practiceUpdated 3 min readBy the FXNOD team
What is drawdown in trading?
Drawdown is the fall in an account from its highest point to the lowest point that follows, usually given as a percentage. An account that rises to 1,000 and falls to 800 has a 20% drawdown. Recovery takes a larger percentage gain than the loss: a 50% drawdown needs a 100% gain to get back to the peak.
How to calculate it
Drawdown equals the peak minus the trough, divided by the peak. From a peak of 1,000 to a low of 800: 200 divided by 1,000, or 20%. Maximum drawdown is the largest such fall over the whole history of an account or a strategy test.
The recovery problem
| Drawdown | Gain needed to return to the peak |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
The gain is measured on a smaller account than the loss was. Lose half and you must double what is left. This asymmetry is the whole case for keeping losses small: shallow drawdowns are repaired by ordinary trading and deep ones almost never are.
Why every strategy has one
Losses cluster. A strategy that wins 55% of the time will still produce runs of six, eight or ten losses over a few hundred trades. Drawdown is the price of the strategy's returns, and a test that shows none has simply been too short.
What a drawdown tells you
- Within the range the test showed: normal. Keep following the rules.
- Well beyond anything the test showed: the strategy may have stopped working, or the test was too small. Reduce size or stop and re-test.
- Caused by trades outside the rules: the problem is discipline, not the strategy.
Keeping it survivable
Risk a small fixed fraction per trade
At 1% per trade, ten losses in a row is a drawdown of about 10%.
Set a daily and a weekly loss limit
They stop a bad run from compounding with bad decisions.
Cut size in a drawdown
Halve the stake after a set fall from the peak, and restore it only when the account recovers.
Avoid recovery sizing
Raising the stake to win losses back turns a normal drawdown into a terminal one.
Drawdown and bots
A session stop loss is a drawdown limit for one run. It does nothing about a week of runs that each end on their stop loss. Track the account's peak yourself and decide in advance the fall at which you stop starting new sessions. Martingale strategies deserve special care here: their balance line shows almost no drawdown until the single run that produces a very large one.
Questions people ask
- What is a good maximum drawdown?
- One you could live through without abandoning the strategy. Many traders aim to keep it under 20%, because recovery beyond that becomes steeply harder.
- What is the difference between drawdown and loss?
- A loss is the result of one trade. Drawdown is the total fall from a peak across however many trades it took, and it ends only when a new peak is made.
- How long does a drawdown last?
- From the peak until the account makes a new high. A strategy can be profitable overall and still spend most of its time below its last peak.
Test your rules before you fund them
Turn a rule into a bot in Bot Forge by answering questions, run it on your Deriv demo account, and read the result trade by trade.
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