What drawdown measures
Drawdown is the fall in your capital from its highest point. If your account goes from $10,000 to $11,000, then back down to $9,900, your drawdown is $1,100, or 10% from the peak. Maximum drawdown is the largest of these falls over a period: the worst stretch your strategy put you through.
Why you must avoid it above all
A fall and the rise needed to recover it are not symmetrical:
| Drawdown | Gain needed to get back to the peak |
|---|---|
| −5% | +5.3% |
| −10% | +11.1% |
| −20% | +25% |
| −30% | +42.9% |
| −40% | +66.7% |
| −50% | +100% |
Beyond 20%, recovering takes months of good trading, under pressure that pushes you towards exactly the wrong moves (revenge trading, bigger positions).
Drawdown and prop firms
Prop firms usually set two limits: a maximum daily loss and a maximum overall loss, often around 5% and 10% of the account. Check your firm's exact rules: some calculate the limit from the starting balance, others from the highest balance reached (trailing drawdown), which changes everything.
To estimate your odds of passing a challenge at your risk per trade, try the prop firm challenge simulator, and read the guide how to pass a prop firm challenge.
Limit it before it happens
- A modest risk per trade: at 1%, ten losses in a row cost 9.6% of the account; at 5%, they cost 40%. See the 1% rule.
- A maximum loss per day and per week, beyond which you stop.
- Reduce size during a drawdown rather than increasing it to win it back.
- Analyze what caused it: a tough market stretch, or a habit (revenge trades, losses not cut) that keeps repeating?
The free diagnostic links your equity curve to the habits that dig into it, and shows what it would have looked like without them.
FAQ
How do you calculate drawdown?
Drawdown = (account peak − current value) ÷ account peak. An account that went from $11,000 to $9,900 is in a 10% drawdown.
What drawdown is acceptable?
It depends on your strategy and constraints. At a prop firm, the rules set the limit (often around 10% overall). On a personal account, many traders cut their size beyond 10%.
How much do I need to make to recover from a 20% drawdown?
25%. The formula is: gain needed = 1 ÷ (1 − drawdown) − 1. For a 50% drawdown, you need to double the remaining capital.