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What is drawdown in trading?

In one line: Drawdown is how far an account has fallen from its highest point before it makes a new high, shown in dollars or as a percent.

Trading glossary · Updated 2026-10-21

A simple example

Your practice account grows from $5,000 to a high of $5,400. Then a run of losing trades takes it to $4,860.

Drawdown = $5,400 − $4,860 = $540. As a percent of the peak: $540 ÷ $5,400 = 10%. The drawdown lasts until the account climbs back above $5,400.

The biggest drop an account has had is called its maximum drawdown. It's a key number in any trading journal.

Why it matters

Losses don't come back evenly. A drop needs a bigger gain to recover:

Try your own numbers in the loss recovery calculator. This is why small, fixed risk matters. At 1% per trade, ten losses in a row is roughly a 10% drawdown. At 5% per trade, the same streak is about 40%.

Drawdown limits

Prop firm challenges usually set drawdown rules, like a maximum daily loss and a maximum total drawdown. Break one and the account is closed, even if your trading idea was fine. The rules differ by firm, and some measure drawdown from the highest balance reached. Read each firm's rules carefully. See prop firm challenges explained.

A personal daily limit, like stopping after two losses, keeps drawdowns small in the same way. More in why traders use a daily loss limit.

A common mistake

Trading bigger to get out of a drawdown fast. It feels logical: bigger trades, quicker recovery. But bigger trades also mean bigger losses if the streak keeps going, which digs the hole deeper. Keep the same small risk and let the plan work through it. If the drawdown hits a level you set in advance, stop and review your journal instead.

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