Risk & Money Management
Beginner
Drawdown
Also called: DD
The decline from a peak in equity to a subsequent trough — measured in percent or dollars.
Definition
Drawdown measures how much your account has fallen from its highest balance. Every strategy has drawdowns; the question is how big, how long, and how often.
Two key metrics: magnitude (deepest %) and duration (time underwater). Most retail traders can’t psychologically sustain >25% drawdowns, even from strategies with positive long-run expectancy.
Example
Account peaks at $12,000, falls to $10,800, then recovers. Drawdown = (12,000 − 10,800) / 12,000 = 10%.
Formula
Drawdown % = (Peak − Trough) / Peak × 100