What It Is
Drawdown measures the decline from a peak to a trough in your account equity, expressed as a percentage. A 20% drawdown means your account dropped 20% from its highest point before recovering.
Key insight: Drawdowns are asymmetric. A 50% loss requires a 100% gain to recover. A 20% loss requires 25% to recover. This asymmetry is why capital preservation is the first rule of trading — deep drawdowns are exponentially harder to recover from.
Every trader experiences drawdowns. The difference between surviving traders and blown accounts is position sizing and risk management that keeps drawdowns within recoverable bounds — typically under 20% maximum.
Managing Drawdown
Most professional traders reduce position size or stop trading entirely when they hit a predetermined drawdown level (e.g., 10-15% of account). This prevents emotional revenge trading from deepening losses.
Your peak equity, current equity, and drawdown percentage should be in your trading journal. If you don't measure it, you can't manage it.
5% drawdown needs 5.3% to recover. 10% needs 11.1%. 20% needs 25%. 50% needs 100%. Keep drawdowns shallow and recovery is manageable.
If you're in a 10% drawdown, cut your position size in half until you recover. The worst thing you can do is try to 'make it back' with bigger trades. That's how 10% becomes 30%.
Continue through core concepts
Compare this reference with related structures and readings before applying it to a live chart.