The definition
Drawdown at any moment is how far the account is below its highest value so far: (peak − current) ÷ peak. Maximum drawdown is the biggest such value over the whole period. It answers a practical question: what was the worst stretch someone holding this strategy would have lived through?
Worked example
An illustrative equity series (E), starting at $10,000 and shown after each trade. The running peak only goes up; the drawdown is how far below it the account sits.
| Trade | Equity | Running peak | Drawdown |
|---|---|---|---|
| 0 | $10,000 | $10,000 | 0.0% |
| 1 | $10,300 | $10,300 | 0.0% |
| 2 | $10,100 | $10,300 | 1.9% |
| 3 | $10,600 | $10,600 | 0.0% |
| 4 | $10,200 | $10,600 | 3.8% |
| 5 | $9,800 | $10,600 | 7.5% |
| 6 | $9,500 | $10,600 | 10.4% |
| 7 | $9,900 | $10,600 | 6.6% |
| 8 | $10,400 | $10,600 | 1.9% |
| 9 | $10,700 | $10,700 | 0.0% |
| 10 | $10,300 | $10,700 | 3.7% |
| 11 | $10,900 | $10,900 | 0.0% |
The highest value before the low is $10,600 (after trade 3). The lowest value after it is $9,500 (after trade 6). Maximum drawdown is ($10,600 − $9,500) ÷ $10,600 = 10.4%, or $1,100. The account made a new high after trade 9, so that drawdown lasted from trade 3 to trade 9 even though the final result is a profit.
The gain needed to recover
A fall of 10.4% needs a gain of 11.6% from the low to return to the peak, because the gain applies to a smaller balance. The gap grows fast with depth, as shown in why a 50% loss needs a 100% gain, and the drawdown recovery calculator does it for any figure.
Three things that change the number
- Closed trades or open equity. A balance that only counts closed trades can hide a deep dip inside a trade. Equity includes open profit and loss and shows the real low.
- Percent or dollars. Percentage drawdown is comparable across account sizes. Dollar drawdown is what a rule such as a daily loss limit uses.
- The period. A longer history can only keep the maximum the same or raise it. Ten trades say little; a short history understates what is possible.
Why it matters for prop firm accounts
Funded-account rules turn drawdown into a hard limit. Some fix the floor at a set dollar level; others raise it as the account makes new highs (a trailing floor). The same equity curve can pass one rule and fail the other, and firms differ on whether they measure the balance or the equity. The rules and a worked comparison are in how prop firm drawdown rules work, and the trailing drawdown calculator lets you test your own numbers. Check each firm's current terms; they change.
Maximum drawdown and risk
A past maximum is not a limit. The next losing streak can be deeper, which is what risk of ruin tries to estimate. Keeping risk per trade small is the main control; see how much to risk per trade.
Try it with your own numbers
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Quick questions
How do you calculate maximum drawdown?
For each point in time take the highest value so far, compute (peak − current) ÷ peak, and keep the largest result.
Is a 20% drawdown bad?
It depends on your tolerance and rules. A 20% fall needs a 25% gain to recover, and many funded accounts have limits far below that.
What is the difference between drawdown and loss?
A loss is measured from your start. Drawdown is measured from the most recent peak, so a profitable account can still be in drawdown.
Does maximum drawdown predict the future?
No. It describes the past sample. A longer or different period can show a deeper one.
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Last updated November 2026. For education only. Not financial advice.