Risk management
Maximum drawdown is the largest peak-to-trough decline in your account before a new high is reached. It is the single best measure of how much pain a strategy (or a trader) has experienced. If you do not track it, you are flying blind.
Drawdown measures the decline from a peak in your account equity to its subsequent low point. It is expressed as a percentage.
Drawdown = (Peak Value − Trough Value) ÷ Peak Value × 100. If your account grows from $10,000 to $15,000 and then drops to $12,000, the drawdown from that peak is: ($15,000 − $12,000) ÷ $15,000 = 20%.
Maximum drawdown is the largest such decline over the entire history of your account or strategy. It represents the worst-case scenario that actually happened.
Monthly equity and running drawdown from peak.
| Month | Account value | Peak | Drawdown |
|---|---|---|---|
| Jan | $50,000 | $50,000 | 0% |
| Feb | $55,000 | $55,000 | 0% |
| Mar | $48,000 | $55,000 | −12.7% |
| Apr | $44,000 | $55,000 | −20.0% |
| May | $52,000 | $55,000 | −5.5% |
| Jun | $58,000 | $58,000 | 0% |
The maximum drawdown was −20.0%, from the February peak of $55,000 to the April trough of $44,000. Even though the account recovered and hit a new high in June, that 20% drawdown stays in the record as part of the strategy’s history.
Track your own drawdown with the Drawdown Calculator.
This is the part that catches most traders off guard. A loss and a gain of the same percentage are not equal. If you lose 50%, you need a 100% gain just to get back to where you started. The math gets worse as the drawdown increases.
Gain required to recover after a drawdown (simplified; 10% annual column is illustrative).
| Drawdown | Gain needed to recover | ~At 10% annual return |
|---|---|---|
| 5% | 5.3% | ~6 months |
| 10% | 11.1% | ~1.1 years |
| 15% | 17.6% | ~1.7 years |
| 20% | 25.0% | ~2.3 years |
| 30% | 42.9% | ~3.7 years |
| 40% | 66.7% | ~5.4 years |
| 50% | 100.0% | ~7.3 years |
| 75% | 300.0% | ~15+ years |
This table is the strongest argument for keeping drawdowns small. A 20% drawdown can be recovered in a reasonable time. A 50% drawdown might take the better part of a decade. A 75% drawdown is effectively a blown account for most retail traders.
Broad ranges — your results will vary.
| Strategy type | Typical max drawdown |
|---|---|
| Buy-and-hold (S&P 500) | 30–55% |
| Swing trading (disciplined) | 10–25% |
| Day trading (experienced) | 5–15% |
| Trend following | 20–40% |
| Market-neutral / hedged | 5–15% |
If your strategy’s drawdown far exceeds these ranges, something is likely wrong with your risk management, not your stock selection.
Drawdowns are not just a math problem. They are a psychological one. Research shows that the pain of losing money is roughly twice as intense as the pleasure of gaining the same amount. A 20% drawdown does not just cost you money. It costs you confidence, sleep, and decision-making clarity.
This is why the best traders are obsessed with limiting drawdowns rather than maximizing returns. A strategy that returns 15% per year with a 10% maximum drawdown is far better than one that returns 25% per year with a 40% maximum drawdown. The Compound Interest Calculator confirms what steady, low-drawdown growth does over time.
Track your maximum drawdown. Know the recovery math. Use position sizing and loss limits to keep it under control. The traders who survive long enough to become profitable are the ones who never let a drawdown get out of hand.
Calculate your drawdown now with the Drawdown Calculator.
Educational content only. Not investment advice. Trading involves substantial risk of loss.