What Is Drawdown in Trading? Max Drawdown Explained

By Rise Together FX team · 11 min read

Line chart that runs flat, dips from a marked peak to a trough and partly recovers below the peak, with a gold bracket labelled drawdown

Drawdown is one of the most useful numbers in trading, and one of the most misunderstood. This guide explains what it means, how it's calculated, the different types you'll see on trading platforms and track records, and why a past drawdown figure tells you what has happened, not the most that can happen.

Trading forex and CFDs is high risk and you can lose all the money you put in. Most retail CFD accounts lose money. This article is general education, not financial advice.

Drawdown in one sentence

Drawdown is how far an account's value falls from a high point before it reaches a new high. It's usually shown as a percentage of that high point, and sometimes as an amount of money.

One quick note to avoid confusion: in UK personal finance, "drawdown" also means a way of taking money out of a pension. That's a different thing entirely. This article is only about drawdown in trading.

Peak-to-trough: how drawdown is calculated

Drawdown is measured from a peak (the highest value the account has reached so far) to a trough (the lowest value before the account climbs above that peak again).

The formula is:

Drawdown % = (peak value − trough value) ÷ peak value × 100

MyFXBook, a widely used site for publishing trading track records, uses the same idea in its drawdown calculator: an account that reaches a high of $100 and then drops to $72 has a drawdown of (100 − 72) ÷ 100 = 28%.

A worked example

Illustrative example (made-up numbers to show the mechanics; not based on any real account or on our strategy, and not a typical or expected result):

Point Account value What's happening

Start £1,000 Initial deposit

A £850 Falls below the starting value

B £1,500 New high (peak)

C £1,290 Falls back (lowest point before any new high)

From the start (£1,000) to A (£850): a drawdown of £150, or 15%.

From the peak at B (£1,500) to the trough at C (£1,290): a drawdown of £210, or 14%.

Notice that the second fall is bigger in pounds (£210) but smaller as a percentage (14%), because it started from a higher point.

Point	Account value	What's happening
Start	£1,000	Initial deposit
A	£850	Falls below the starting value
B	£1,500	New high (peak)
C	£1,290	Falls back (lowest point before any new high)

Every time the account sets a new high, the measurement starts again from that new high. The largest fall recorded along the way becomes the maximum drawdown.

Maximum, absolute and relative drawdown

Trading platforms and reports use a few related terms. The MetaTrader 5 platform defines them precisely in its testing reports, and the definitions are a useful reference.

Maximum drawdown

The largest fall from a high point to the following low, at any time in the period. MetaTrader 5's "maximal" drawdown is the largest fall in money terms. In the example above, that's the £210 fall from B to C.

Relative drawdown

The largest fall from a high point to the following low in percentage terms. In the example, that's the 15% fall from the start to A, even though it was the smaller fall in pounds.

The two can come from different parts of the history, which is why a report may show different figures for "maximal" and "relative" drawdown.

Absolute drawdown

How far the account fell below its starting deposit. MetaTrader 5 calculates this as the initial deposit minus the lowest balance below it. In the example, the account started at £1,000 and its lowest point below that was £850, so the absolute drawdown is £150. If an account never dips below its starting deposit, its absolute drawdown is zero, even if it has had large falls from later highs. That is why absolute drawdown on its own can understate risk.

Drawdown depth vs drawdown duration

Depth is how far the account fell. Duration is how long it took to get back above the previous high. The two tell you different things. A 15% drawdown that recovered in two weeks feels very different from a 15% drawdown that took a year to recover, or one that never did. Many track-record tools show a drawdown chart over time, which lets you see both: how deep each fall went and how long the account stayed below its previous high.

Long drawdowns matter because they test whether someone keeps going. An account that spends months below its previous high is where many people give up and stop, which can mean stopping at or near the low point.

Which one matters?

When people say "max drawdown" without qualification, they usually mean the largest percentage fall from a peak. Whichever figure you look at, check which definition the platform uses, and whether it's measured on balance or on equity (next section).

Balance drawdown vs equity drawdown

This is the distinction that matters most for many strategies.

Balance is the money in the account from closed trades. It changes only when a trade is closed (or money is deposited or withdrawn).
Equity is the balance plus or minus the profit or loss on trades that are still open. MetaTrader 5 calculates equity as balance plus credit minus commission, plus or minus floating profit or loss.

A loss on an open trade is called a floating loss. It hasn't been "realised" yet, but it's real: if the trades were closed now, that's what the account would be worth.

Illustrative example (made-up numbers; not based on any real account or on our strategy): an account has a balance of £2,000 and five open trades showing a combined floating loss of £600. The balance still reads £2,000, but the equity is £1,400. A balance drawdown figure would show nothing yet. An equity drawdown figure would show a 30% fall from £2,000.

Strategies that hold losing trades open for a long time, while closing winning trades quickly, can show a smooth balance line while equity swings widely underneath. If you only look at balance, you can miss most of the risk. Our guide to equity vs balance explains floating losses in more detail.

Equity also matters because the broker uses it to decide whether there's enough margin to keep trades open. If equity falls too far, positions can be closed automatically, which turns floating losses into real ones. See margin call vs stop out.

Why recovery needs a bigger gain than the loss

Losses and gains aren't symmetrical. After a fall, the account is smaller, so it needs a larger percentage gain just to get back to where it was.

Gain needed to recover = loss ÷ (1 − loss)

Drawdown	Gain needed to get back to the previous high
10%	11.1%
20%	25.0%
25%	33.3%
30%	42.9%
40%	66.7%
50%	100.0%
75%	300.0%
90%	900.0%

This table is arithmetic, not a forecast. It doesn't suggest any account will recover.

For example, an account that falls from £1,000 to £500 has lost 50%. To get back to £1,000 it needs to double, a 100% gain. The deeper the drawdown, the harder the climb back, and an account that is closed out at a loss doesn't get the chance to recover at all.

Why position size and leverage change the size of a drawdown

The same price move can produce very different drawdowns, depending on how large the trades are compared with the account. Leverage lets a small deposit control a large position, so it magnifies drawdowns as well as gains.

Illustrative example (made-up numbers to show the mechanics; not based on any real account or on our strategy): two accounts each hold £1,000. Account A opens a trade where every pip of price movement is worth £0.10. Account B opens the same trade at ten times the size, so every pip is worth £1. If the price moves 100 pips against both, Account A is down £10 (a 1% drawdown) and Account B is down £100 (a 10% drawdown). Same market, same move, ten times the drawdown.

This is why two people following the same strategy can see very different drawdowns, and why trade size matters as much as the strategy itself. See What is leverage in forex?

Why a past maximum drawdown is not a limit or a target

This is the most important point in this guide.

A maximum drawdown figure on a track record tells you the largest fall that has happened so far, on that account, over that period. It does not tell you:

the largest fall that can happen;
the largest fall that will happen in future;
what drawdown a different account, starting at a different time, would see.

Markets can behave in ways they haven't before. A strategy can meet conditions it has never traded through. Gaps over weekends or around major news, wider spreads and sudden one-way moves can all push drawdown beyond anything in the history. A record with a short history may not have met a difficult period yet.

So when you see "max drawdown: X%", read it as "at least X% has happened", not "no more than X% will happen". Any strategy can draw down further, up to the loss of all the money in the account.

How strategy type changes drawdown

Different trading approaches tend to produce drawdowns of different shapes. These are general tendencies, not rules.

Trend-following and stop-loss strategies

These typically close losing trades at a set level and accept many small losses while waiting for larger winning moves. Drawdowns often come as long, gradual runs of small losses. Balance and equity tend to stay closer together because losing trades are closed rather than held.

Grid strategies

A grid places trades at set price intervals and may add more as price moves against the open trades. Losing trades are often held open while winners are closed. That can produce a balance line that rises in small steps, with large equity drawdowns building up underneath during a strong move in one direction.

Martingale strategies

Martingale approaches increase the trade size after a loss or as price moves further away. They can recover small losses quickly, but in a long one-way move the growing position sizes can make drawdowns grow very fast, and losses can compound into large or total losses.

We explain both in detail, including exactly how losses build up, in Grid trading vs martingale. Leverage makes every type of drawdown larger relative to the deposit; see What is leverage in forex?

How to find drawdown on a track record

On a public track record, look for:

The maximum drawdown figure, and whether it's based on balance, equity or both.
A drawdown chart over time, which shows how deep and how long each drawdown was.
How long the record is. A short record may not include a difficult period.
Deposits and withdrawals, which can make the balance chart look better or worse than the trading was.

MyFXBook states that a drawdown percentage represents a loss, realised or not, at some point in the account's history. It announced equity-based drawdown in 2012. Our guide on how to read a MyFXBook track record walks through where each figure sits on the page.

Key takeaways

Drawdown is the fall from a high point to a later low, usually shown as a percentage of the high.
Maximum drawdown is the largest such fall so far. Absolute drawdown is the fall below the starting deposit. Relative drawdown is the largest percentage fall.
Equity drawdown includes losses on open trades; balance drawdown doesn't. For strategies that hold losing trades, equity is the number to watch.
After a loss, recovery needs a bigger percentage gain than the loss itself.
A past maximum drawdown is a record of history. It is not a limit, a cap or a target, and future drawdowns can be larger, up to the total loss of the account.
Most retail CFD accounts lose money. If you want to understand why, read why most retail CFD traders lose money.