Max drawdown explained: how to measure it and how to limit it

Your win rate and total profit tell you how a strategy did. Maximum drawdown tells you what it felt like: the deepest fall from a high point that you had to sit through. It's one of the best measures of risk, and of whether you could actually stick with a strategy.

What drawdown is

A drawdown is a fall from a previous peak in your account balance. The maximum drawdown is the largest such fall over a period, measured as a percentage of the peak.

Drawdown = (peak − low point) ÷ peak

Example

Your account grows from $1,000 to a peak of $1,300. Then a rough patch takes it down to $1,040 before it recovers.

• Drawdown: (1,300 − 1,040) ÷ 1,300 = 20%
• It doesn't matter that you're still above your starting $1,000. The drawdown is measured from the peak.

Why drawdowns hurt more than they look

To get back to a peak, you need a bigger gain than the loss you took:

Gain needed to recover = 1 ÷ (1 − drawdown) − 1

Drawdown	Gain needed to get back
10%	11.1%
20%	25.0%
30%	42.9%
50%	100.0%

In the example, $1,040 has to grow by 25% to get back to $1,300. The deeper the hole, the faster this gets out of hand. The losing streak calculator shows how quickly a run of losses digs one.

How to measure it

1. Track your balance after each closed trade, including deposits and withdrawals separately so they don't count as gains or losses.
2. Keep a running peak: the highest balance so far.
3. After each trade, work out how far you are below the peak.
4. The largest of those numbers is your max drawdown.

A detail worth deciding: most traders count the starting balance as the first peak. That way a strategy that loses from day one shows a drawdown straight away, instead of only after its first new high. TradeTurtle does it this way.

What's a "normal" drawdown?

There's no single answer. It depends on your risk per trade, your win rate and how often you trade. What matters more is knowing your typical drawdown, so a normal rough patch doesn't push you into changing a working strategy, and an abnormal one gets your attention.

A useful habit: before you start, write down the drawdown at which you'll stop and review. For example, "at 15% I stop trading for a week and go through the journal."

How to keep drawdowns small

• Small, fixed risk per trade. This is the biggest lever. At 1% per trade, ten losses in a row is a drawdown of under 10%; at 5% it's about 40%. See the 1% rule.
• Honour your stops. Losses bigger than 1R deepen drawdowns fast. Check your journal for them.
• Cut size in a drawdown, not increase it. Trying to win it back quickly with bigger trades is how drawdowns become blow-ups (see revenge trading).
• Watch costs. Fees and funding are a steady drag that deepens every drawdown.

TradeTurtle shows your max drawdown on the stats page, worked out from your starting balance, closed trades and deposits and withdrawals, and your equity curve sits at the top of your logbook.