Key Takeaways
- Drawdown is how far your account falls from its highest point. An account that peaks at $12,000 and drops to $9,600 is in a 20% drawdown, even if it is still above the starting deposit.
- Deep drawdowns are much harder to recover from. A 20% drawdown needs a 25% gain to recover, and a 50% drawdown needs a 100% gain.
- Risk per trade decides how deep drawdowns get. Ten losses in a row cost about 9.6% at 1% risk per trade, but about 40% at 5% risk.
- Judge strategies and bots by equity drawdown, not just profit. Two strategies with the same profit can have very different drawdowns, so check maximum drawdown, its duration and any built in drawdown limit.
Drawdown in trading is how far your account falls from its highest point before it recovers. If your account grows to $12,000 and then drops to $9,600, your drawdown is $2,400, or 20%, measured from that $12,000 peak. Maximum drawdown is the largest of these falls over a period, and it is one of the clearest ways to see how risky a trader, strategy or trading bot really is.
Drawdown matters because losses and gains are not symmetrical. A 20% drawdown needs a 25% gain just to get back to where you were, and a 50% drawdown needs a 100% gain. This guide explains drawdown in plain language, with simple examples, the formulas, the different types you will see in MetaTrader and prop firm rules, and practical ways to keep it under control.
What Is Drawdown? A Simple Example
Think of your account balance as a line on a chart. Every time it reaches a new high, that becomes your new peak. Whenever it falls below that peak, you are in a drawdown, and the drawdown lasts until the account climbs back above the old peak.
Here is an account over six months:
| Month | Account value | Highest value so far | Drawdown from the peak |
|---|---|---|---|
| 1 | $10,000 | $10,000 | 0% |
| 2 | $11,000 | $11,000 | 0% |
| 3 | $12,000 | $12,000 | 0% |
| 4 | $10,800 | $12,000 | 10% |
| 5 | $9,600 | $12,000 | 20% |
| 6 | $12,500 | $12,500 | 0% |
The account ended up making money overall, but along the way it lost 20% from its peak. That 20% is the maximum drawdown for this period. It tells you something the final profit hides: anyone running this account had to sit through watching $2,400 disappear before it came back.
How to Calculate Drawdown
The formula is simple:
Drawdown = (Peak value − Lowest value after the peak) ÷ Peak value × 100
Using the example above: ($12,000 − $9,600) ÷ $12,000 × 100 = 20%.
Three details make the calculation useful:
- Always measure from the peak, not from your starting balance. If you deposit $10,000, grow it to $15,000 and fall back to $12,000, you are still in profit, but you are in a 20% drawdown.
- Use the lowest point before a new peak. The drawdown ends only when the account makes a new high.
- Note how long it lasted. The time from the peak to full recovery is called the drawdown duration. Two strategies with the same 20% drawdown feel very different if one recovers in two weeks and the other takes a year.
For a deeper look at the formula, including how investment firms apply it, see Wall Street Prep’s guide to maximum drawdown.
Types of Drawdown You Will See
The word drawdown is used in several slightly different ways, and mixing them up is a common source of confusion.
| Type | What it measures | Where you see it |
|---|---|---|
| Maximum drawdown | The largest fall from any peak to the lowest point after it | Backtest reports, Myfxbook, strategy comparisons |
| Current drawdown | How far the account is below its most recent peak right now | Live account monitoring |
| Balance drawdown | Falls in closed trade balance only | MT4 and MT5 reports |
| Equity drawdown | Falls including open, unrealized losses | MT4 and MT5 reports, Myfxbook, prop firm rules |
| Absolute drawdown | How far the balance fell below the starting deposit | MT4 and MT5 Strategy Tester reports |
| Daily drawdown | The largest loss allowed or recorded within one trading day | Prop firm rules |
Balance drawdown vs equity drawdown
This difference is the one that matters most. Your balance only changes when trades close. Your equity is the balance plus or minus the profit or loss on open trades.
Say your balance is $10,000 and you have several open trades that are down $2,500 in total. Your balance drawdown is 0%, because nothing has closed. Your equity drawdown is 25%. If those trades are closed at a loss, the 25% becomes real.
Strategies that keep losing trades open, such as grid, multi level and some hedging methods, can show a smooth balance curve while equity swings far lower. That is why equity drawdown is usually the more honest number.
Why Drawdown Matters: The Recovery Math
The deeper the drawdown, the harder it is to climb out, because the gain you need is calculated on a smaller balance.
| Drawdown | Gain needed to recover | Example on a $10,000 account |
|---|---|---|
| 10% | 11.1% | Fall to $9,000, need $1,000 back |
| 20% | 25% | Fall to $8,000, need $2,000 back |
| 30% | 42.9% | Fall to $7,000, need $3,000 back |
| 40% | 66.7% | Fall to $6,000, need $4,000 back |
| 50% | 100% | Fall to $5,000, need to double it |
| 75% | 300% | Fall to $2,500, need to quadruple it |
The formula behind this table is: gain needed = drawdown ÷ (100 − drawdown) × 100. Small drawdowns are easy to recover from. Large ones can take years, or never recover at all. This is the main reason experienced traders focus on limiting drawdown first and chasing returns second.
How Losing Streaks Create Drawdown
Even a good strategy has losing streaks. How deep the drawdown gets during a streak depends almost entirely on how much you risk on each trade.
Here is what 10 losing trades in a row do to an account at different risk levels, with each loss taken from the shrinking balance:
| Risk per trade | Drawdown after 10 straight losses |
|---|---|
| 0.5% | About 4.9% |
| 1% | About 9.6% |
| 2% | About 18.3% |
| 5% | About 40.1% |
| 10% | About 65.1% |
Ten losses in a row sounds unlikely, but it is not rare over hundreds of trades. A strategy that wins 50% of the time has roughly a 1 in 1,000 chance of losing 10 in a row starting from any given trade, and a much higher chance of hitting such a streak somewhere across a long run of trades.
The trader risking 1% loses less than 10% and can recover with an 11% gain. The trader risking 10% loses nearly two thirds of the account and needs to almost triple what is left. Same strategy, same streak, completely different outcome. Our guide to the 1% rule in forex explains how to size trades this way.
Worked Example: Two Strategies With the Same Profit
Imagine two strategies, both tested on a $10,000 account over the same year, and both finishing at $13,000.
| Strategy A | Strategy B | |
|---|---|---|
| Final balance | $13,000 | $13,000 |
| Net profit | 30% | 30% |
| Maximum drawdown | 8% | 35% |
| Longest drawdown | 6 weeks | 5 months |
| Profit divided by maximum drawdown | 3.75 | 0.86 |
On profit alone, they look identical. On drawdown, they are very different. Strategy B took the account down 35% at one point and stayed under water for five months. Most traders would have stopped it before it recovered, locking in the loss.
The last row is a simple version of the recovery factor, net profit divided by maximum drawdown. Higher is better: it shows how much profit the strategy earned for each unit of pain it put you through. Our guide to consistent expert advisors covers this and other metrics for comparing strategies.
How to Read Drawdown in MT4 and MT5 Reports
When you backtest an Expert Advisor or view an account report in MetaTrader, you will see several drawdown figures. Here is what each one means.
| Report figure | What it means | How to use it |
|---|---|---|
| Absolute drawdown | How far the balance fell below the starting deposit | Shows whether the strategy lost money early on. Often small and easy to misread |
| Maximal drawdown | The largest fall from a peak in money, with its share of the account | The main risk figure to compare strategies |
| Relative drawdown | The largest fall in percentage terms, with its money value | Useful when the account size changed a lot during the test |
| Equity drawdown (MT5) | The same measures, including open trade losses | Usually larger than the balance figures and more realistic |
Two points catch people out. First, the maximal and relative figures can come from different drawdowns: the biggest fall in dollars may happen late in a test when the account is larger, while the biggest fall in percentage terms may happen early. Second, check whether each figure is based on balance or equity. MT5 lists balance and equity drawdown separately, and in either platform you can compare the numbers with the equity line on the Graph tab to see how deep open losses went.
Our guide on how to backtest your expert advisor walks through the full report.
Drawdown on Myfxbook and Other Trackers
When you look at a trader’s or a bot’s results on a third party tracker such as Myfxbook, the drawdown figure is often more useful than the gain. A large gain with a small drawdown suggests steady risk control. A large gain with a large drawdown usually means the strategy took big risks and got through them, at least so far.
When comparing tracked accounts, check:
- Is the drawdown based on equity or balance? Equity based figures include open losses.
- How long has the account run? A low drawdown over two months says little. Over several years, it says much more.
- Is the drawdown still current? An account sitting in a deep drawdown right now may still be recovering, or may not recover.
- How large was the deposit? Small accounts with frequent deposits and withdrawals can make figures harder to read.
Drawdown Rules at Prop Firms
Prop firms use drawdown limits as their main risk rule. Breaking one usually ends the challenge or the funded account, even if the account is in profit overall.
| Rule | What it usually means | Example on a $100,000 account |
|---|---|---|
| Daily drawdown | The largest loss allowed within one trading day | A 5% limit means you cannot lose more than $5,000 in a day |
| Static maximum drawdown | The account cannot fall below a fixed level | A 10% limit means equity must stay above $90,000 |
| Trailing maximum drawdown | The floor rises as the account makes new highs | If the account peaks at $106,000, the floor moves up to $96,000 |
Firms calculate these differently. Some measure the daily limit from the balance at the start of the day, others from equity, and some include open losses at any moment. A trader can break a daily limit with a trade that later recovers, because the floating loss touched the limit for a few seconds.
In practice, this means setting your own limits inside the firm’s limits. If the firm allows 5% a day, stopping yourself at 3% leaves room for slippage and floating losses. Our guides to prop firm EA rules and running a prop firm EA on MT4 cover how firms apply these rules and how to set an EA to stay within them.
How to Control Drawdown
You cannot avoid drawdown completely. Every strategy has losing periods. What you can control is how deep it gets.
- Keep risk per trade small and fixed. Risking 0.5% to 1% per trade keeps even a long losing streak to a recoverable drawdown, as the losing streak table above shows.
- Use a stop loss on every trade. A trade without a stop has no defined maximum loss, so your drawdown has no defined maximum either. Our guide to setting stop loss and take profit in MT4 shows how.
- Set daily and weekly loss limits. Stop trading for the day after losing a set amount, such as 2% or 3%. This stops one bad session from turning into a deep drawdown.
- Set a maximum drawdown circuit breaker. Decide in advance the drawdown at which you stop and review everything, such as 15% or 20%.
- Reduce size during a drawdown. Some traders halve their risk per trade once the account is 10% below its peak, then return to normal after a new high.
- Avoid strategies that add to losers without a limit. Martingale, grid and some recovery methods can show smooth results for months, then produce a very deep drawdown in one strong trend.
- Spread risk across uncorrelated trades. Five trades on pairs that all move with the US dollar act like one big trade. Our guide to lot sizes and leverage explains how leverage affects this.
Drawdown is also where most trading mistakes happen. After a run of losses, it is tempting to raise lot sizes to win it back faster, which usually makes the drawdown deeper. Our guide to forex trading bias covers the habits behind this.
What drawdown should you plan for?
There is no single correct number. It depends on your strategy and how much you can stomach without abandoning your plan. A practical approach:
- Decide your limit before you start. The largest fall you could live with without quitting or changing the strategy.
- Expect live drawdown to be deeper than in testing. A backtest shows the worst drawdown that happened in the past, not the worst that can happen. A cautious approach is to plan for a live drawdown well beyond the test figure, such as one and a half to two times it.
- Size positions to fit that limit. If a strategy’s backtest shows a 15% drawdown at 2% risk and your limit is 15%, halving the risk per trade gives you room for a live drawdown worse than the test.
Drawdown and Trading Bots
Drawdown is the most important number to check before running any Expert Advisor. A bot will keep trading through a losing period exactly as programmed, so its settings decide how deep a drawdown can go. Before running an EA, check its maximum drawdown over several years of testing, whether that figure is based on equity, and whether the EA has its own drawdown limit that closes trades.
XAUBOT, our own platform, lets you set these limits when you customize a bot. You can set a maximum drawdown that closes all trades when reached, daily drawdown controls, and a stop loss and take profit on each trade. Every strategy is tracked on a public Myfxbook account, so you can check its drawdown, not just its gain, before choosing it.
You can see the options for currencies on our forex trading bot page and for gold on our gold trading EA page. Every bot works on both MetaTrader 4 and MetaTrader 5, and you can test any setup free for 15 days on a demo account.
Drawdown in Trading Questions
Is drawdown the same as a loss?
Not exactly. A loss is the result of a single trade or period. Drawdown measures how far the account is below its highest point, which can include several losses and open trades. An account can be in profit overall and still be in a drawdown.
What is a good maximum drawdown?
There is no universal standard. Many conservative traders aim to keep maximum drawdown under about 10% to 20%, while higher risk strategies may accept more. What matters most is that the drawdown fits your limit and that the profit is worth it, which the recovery factor helps show.
Does drawdown include open trades?
Equity drawdown does, and balance drawdown does not. Equity drawdown is the more complete measure, because open losses can become real at any time.
How long does it take to recover from a drawdown?
It depends on the depth of the drawdown and how fast the strategy makes money. Deep drawdowns take much longer, because the gain needed grows faster than the loss: 25% to recover from 20%, but 100% to recover from 50%.
Can a drawdown lead to a margin call?
Yes. If open losses push equity down far enough, the broker can issue a margin call or close positions automatically. Our guide to margin calls in forex explains how that works.
Final Word
Drawdown in trading tells you what profit figures do not: how much pain a strategy put you through to earn its returns. Measure it from the peak, use equity rather than balance, and remember that deep drawdowns need much larger gains to recover. Small, fixed risk per trade and clear loss limits are what keep it under control.
Trading with leverage carries a high risk of loss. Only trade with money you can afford to lose.
