Drawdown
How far the account has fallen from its peak. The main figure a trader is judged by.
Drawdown — what it is?
A drawdown is a decline of the account from the peak it reached. Maximum drawdown is the deepest such decline over a period.
This is the key survival metric. Return shows how much the system earned; drawdown shows whether you will survive the road to that.
Recovery is not symmetric with the loss. After minus 20% you need to make 25%, after minus 50% you need 100%. That is exactly why a deep drawdown is more dangerous than it looks.
Drawdown — how it is built?
It is measured on the equity curve, not on individual trades. A guideline: if the expected drawdown exceeds the level at which you would stop following your plan, the risk per trade has been set too high.
Drawdown — common mistakes
Looking only at returns.
Increasing risk during a drawdown to climb out faster.
Measuring drawdown on closed trades while ignoring open ones.
Not knowing in advance what drawdown you are able to sit through.
Related to
Glossary
- maximum drawdown
- the largest such fall over the period.
- equity curve
- the chart of the account over time. The main artefact a trader is judged by.
- Risk per trade
- the share of the account you are ready to risk in one trade. Set in advance and not changed along the way.
- high
- the highest price of the period.
- open
- the first price of the period.