Glossary
What Is Drawdown and How Do You Calculate It
The fall of the equity curve from its last peak. Max drawdown is the worst such fall: how much you gave back in your worst stretch.
How it works
Drawdown is the decline of the results curve from its most recent high point to the current point, usually expressed as a percentage or in dollars. While balance keeps setting new highs, drawdown sits at zero; once a losing streak or profit pullback starts, drawdown grows until a new peak is set.
Maximum drawdown is the largest decline from a peak across the whole period being measured, not the current reading today. It's maximum drawdown, specifically, that usually shows up in prop firm limits and strategy risk assessment, because it captures the worst scenario the system has already lived through.
Drawdown matters not for its own sake but because of recovery math: a 20% loss needs a 25% gain to get back to the starting balance, while a 50% loss needs a full 100% gain. So the depth of a drawdown directly determines how much time and risk it takes to recover from it.
Example
Peak balance is $10,000. A losing streak then pulls the balance down to $7,500. Drawdown = (10,000 − 7,500) / 10,000 × 100 = 25%. Getting back to $10,000 from $7,500 now requires a 33.3% gain.
Common mistake
A common mistake is calculating drawdown only from the starting deposit instead of the current peak balance. That understates the real drawdown once the account has already grown above its starting amount.
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Related terms
Frequently asked questions
- How is drawdown different from a single losing day?
- Drawdown is the cumulative pullback from a peak, which can stretch over weeks, while a losing day is just one step along the way in or out of it.
- What drawdown level is considered safe?
- There's no universal threshold, but many prop firms and personal risk plans cap it around 5–10% daily and 10–20% overall — beyond that, the risk of blowing the account grows nonlinearly.
What's left of the daily limit — as the day goes
Give an account a daily limit and the Trading OS journal shows how much more you can lose today, from your closed trades.
No sign-up — the journal runs in your browser; an account is only needed for sync.