Maximum drawdown is the largest fall from a peak in account equity to the lowest point that comes after it, before a new peak is reached. It is usually written as a percentage. A maximum drawdown of 18 percent means that, at its worst, the account was down 18 percent from a previous high.
How it is measured
Track the running high-water mark of the equity curve - the highest balance reached so far. Whenever the balance dips below that mark, you are in a drawdown. The deepest of all those dips across the whole test is the maximum drawdown. It captures the worst stretch, not the average one.
Drawdown % = (Peak equity - Trough equity) / Peak equity x 100
Why depth matters so much
Losses and the gains needed to recover them are not symmetric. A shallow dip is easy to climb out of; a deep one is brutal:
- Lose 10% -> need +11% to recover.
- Lose 20% -> need +25% to recover.
- Lose 50% -> need +100% to recover.
- Lose 70% -> need +233% to recover.
This is why professionals obsess over keeping drawdown shallow. A strategy that never digs a deep hole compounds far more reliably than one that periodically blows up and has to claw back.
Duration matters as much as depth
A 12 percent drawdown that recovers in two weeks feels very different from a 12 percent drawdown that grinds on for four months. The slow bleed is where discipline dies: nothing works for a long time, doubt creeps in, and traders start abandoning rules or revenge trading. When you review a backtest, look not only at how deep the worst drawdown went, but at how long it lasted.
Important: a backtest with a suspiciously small drawdown may be hiding skipped losing trades or testing only one calm market regime. Make sure the sample includes a genuinely difficult period, or the drawdown figure is meaningless.
What counts as an acceptable drawdown
There is no single right answer - it depends on your risk per trade, your psychology, and any account rules. Common reference points:
- Under 20% - a target many discretionary traders aim to stay within.
- 5% to 10% - the strict limits typical of prop firm challenges, where breaching the cap ends the account.
- Whatever you can hold - the honest test is whether you can keep executing during the worst stretch shown in the backtest.
How drawdown connects to the other metrics
Drawdown is meaningless in isolation. A 25 percent drawdown might be fine for a strategy that returns 80 percent a year and terrible for one that returns 10 percent. Read it beside profit factor, expectancy, and the Sharpe ratio. Together they tell you not just whether the strategy makes money, but whether you could realistically survive holding it.
Seeing your worst stretch before it's real
The safest place to discover your maximum drawdown is a backtest, not a live account. When you replay charts in a simulator, the equity curve and maximum drawdown are calculated for you, so you can look at the deepest dip and ask the only question that matters: could I have kept trading the plan through that? If the honest answer is no, reduce risk per trade before you ever go live.
Maximum drawdown FAQ
What is maximum drawdown?
The largest percentage drop from a peak in account equity to the lowest point that follows before a new peak. It describes the worst losing stretch a strategy put the account through.
What is a good maximum drawdown?
No universal number, but many traders aim under 20 percent, and prop firms often cap it at 5 to 10 percent. The real test is whether you can keep following the plan through it.
Why does a 50 percent drawdown need a 100 percent gain to recover?
Because gains are calculated on the smaller post-loss balance. A $10,000 account down to $5,000 must double just to break even. Deep drawdowns are mathematically punishing.