What Is Drawdown in Trading? Maximum, Daily and Relative Drawdown Explained

Drawdown in trading is the drop in your account from its highest point to its lowest point before a new high is made. It is the number that tells you how much pain a strategy puts you through on the way to its results, and it decides whether you survive long enough to see them. This guide explains how to calculate drawdown, the difference between maximum, relative, absolute and daily drawdown, how MT5 reports each one, and how to keep drawdown within limits you can live with.

What Is Drawdown in Trading?

Drawdown is the decline in an account's value from a peak to a subsequent low, measured in money or as a percentage of the peak. If your account grows to $12,000 and then falls to $10,800, you are in a drawdown of $1,200, or 10%. The drawdown ends only when the account makes a new high above $12,000.

The concept comes from performance measurement, where drawdown is defined as the fall from a running peak in a strategy's cumulative profit or equity. It measures the path, not the destination. Two strategies can both finish the year up 20%, and one of them can have fallen 40% along the way.

A drawdown is not the same as a loss. A single losing trade is a loss; a drawdown is the total decline across all trades, winning and losing, from the last high to the lowest point since. A drawdown can include several winners that were wiped out by larger losers.

How to Calculate Drawdown: Formula and Worked Example

Drawdown is calculated by subtracting the lowest account value from the preceding peak, then dividing by that peak to get a percentage. The formula is: Drawdown % = (Peak value minus Trough value) ÷ Peak value × 100.

Here is an account tracked over several months:

The account had two separate drawdowns. The first fell from $12,000 to $9,600, a drawdown of $2,400, or 20%. The second fell from $13,000 to $11,700, a drawdown of $1,300, or 10%. The maximum drawdown for the whole period is 20%, the larger of the two.

Note that the first drawdown took the account below its $10,000 starting balance, while the second never did. That distinction is the basis of absolute drawdown, covered next.

Maximum, Relative and Absolute Drawdown: The MT5 Definitions

MT5 reports three types of drawdown in its Strategy Tester report, and each answers a different question. Absolute drawdown measures how far the account fell below the initial deposit. Maximal drawdown measures the largest peak-to-trough fall in money. Relative drawdown measures the largest peak-to-trough fall as a percentage.

In MetaTrader 5, each figure appears twice in the report, once for balance and once for equity. Maximal drawdown shows the money figure first with its percentage in brackets, and relative drawdown shows the percentage first with its money figure in brackets.

Why Maximal and Relative Drawdown Can Show Different Drawdowns

Maximal and relative drawdown can come from two different periods, which surprises many traders reading an MT5 report. The largest fall in money and the largest fall in percent are not always the same event.

Take an account that starts at $10,000 and falls to $8,000 early on, a drawdown of $2,000, or 20%.

It then grows to $30,000 and later falls to $27,000, a drawdown of $3,000, or 10%. MT5 reports the maximal drawdown as $3,000 (10%), because $3,000 is the biggest money fall. It reports the relative drawdown as 20% ($2,000), because 20% is the biggest percentage fall. Absolute drawdown is $2,000, the gap between the $10,000 deposit and the $8,000 low.

When you compare strategies, relative drawdown is usually the more useful number. A $3,000 fall means very different things on a $30,000 account and a $5,000 account, while a percentage scales with the account.

Balance Drawdown vs Equity Drawdown

Balance drawdown counts only closed trades, while equity drawdown includes the floating profit or loss on open positions. Equity drawdown is always equal to or larger than balance drawdown, because it captures the worst moment of each trade, not just where it closed.

Suppose your balance is $10,000 and you buy 1 lot of EURUSD. The trade moves 80 pips against you, a floating loss of $800, so your equity drops to $9,200.

The price then recovers and you close the trade at minus 30 pips, a loss of $300. Your balance drawdown is $300, or 3%. Your equity drawdown was $800, or 8%.

Strategies that hold losing trades for a long time, such as grid or averaging-down systems, often show tiny balance drawdowns and huge equity drawdowns. Judge any strategy by its equity drawdown, because equity is what your margin and stop-out level are based on. Even with the best forex broker for your trading style, the platform closes positions at stop-out based on equity, not on the closed-trade balance.

What Is Daily Drawdown?

Daily drawdown is the largest loss an account is allowed to take within a single trading day, usually set as a percentage of the balance or equity at the start of that day. It is a rule used mainly by proprietary trading firms and funded-account programmes, and it is the rule that ends most of those accounts.

A typical example is a 5% daily limit on a $100,000 account. If the limit is based on the starting balance, the floor for the day is $95,000 of equity. Breaching that floor at any moment counts, even if the trade later recovers. If your equity touches $94,999 at 10 a.m. and the trade closes in profit at noon, the rule has already been broken.

Firms define the starting point differently. Some use the balance at the daily reset, often midnight server time; others use whichever is higher of the balance or the equity at that moment. If you start the day with $3,000 of floating profit on a $100,000 balance and the firm uses the higher figure, the reference becomes $103,000 and the floor rises to $97,850. Read your firm's exact wording before you trade, because these details decide breaches.

A standard retail account has no daily drawdown rule at all. The only hard floor on a retail account is the margin stop-out level, where the platform starts closing positions because equity has fallen too far relative to used margin. Any daily limit on a personal account has to come from your own risk plan.

Trailing Drawdown vs Static Drawdown

A static drawdown limit is fixed at a set amount below the starting balance, while a trailing drawdown limit moves up as the account makes new highs and never moves back down. Both are common in funded-account rules.

With a static 10% limit on a $100,000 account, the floor stays at $90,000 for the life of the account. With a trailing $6,000 limit, the floor starts at $94,000. If equity climbs to $104,000, the floor rises to $98,000 and stays there even if equity later falls.

Trailing drawdown punishes giving back open profit. Under an intraday trailing rule, which updates on every tick, a trade that runs to +$3,000 and closes at +$500 has raised the floor by $3,000 while adding only $500 to the account. Your headroom shrinks even though you made money. End-of-day trailing rules update only at the daily close, which is more forgiving.

The Maths of Recovery: Why a 50% Drawdown Needs a 100% Gain

Recovering from a drawdown always takes a larger percentage gain than the percentage lost, because the gain is calculated on a smaller balance. The formula is: Gain needed = Drawdown ÷ (1 minus Drawdown).

The table shows why drawdown control matters more than return chasing. A $10,000 account that falls 50% to $5,000 must double to get back to even. Small drawdowns are easy to recover; large ones change what you need from the market entirely.

How Losing Streaks Turn Into Drawdown

A losing streak converts directly into drawdown, and the size of the drawdown depends almost entirely on how much you risk per trade. Losing streaks are normal even for good strategies, so risk per trade is the main lever you control.

Here are ten consecutive losses at different risk levels, with each loss taken as a percentage of the current balance:

Streaks of that length happen more often than most traders expect. For a strategy that wins half its trades, the longest losing run in a sample of 500 trades is typically around 8, and roughly one 500-trade sample in five contains a run of 10 or more. A trader risking 5% per trade will meet a 40% drawdown sooner or later from bad luck alone.

Using Drawdown to Judge a Strategy or Signal Provider

Maximum drawdown is one of the most important numbers for judging any strategy, expert advisor or signal provider, because it shows the worst decline you would have had to sit through. Compare it with the return the strategy produced to see whether the reward justifies the pain.

The recovery factor, which MT5 reports in its tester, divides net profit by the maximum drawdown. A strategy that made $6,000 with a maximum drawdown of $2,000 has a recovery factor of 3. One that made the same $6,000 with a $6,000 drawdown has a recovery factor of 1, and its owner spent part of the period with half the profit gone.

The same check applies before you follow anyone through copy trading. Look at the provider's maximum equity drawdown, how long it took to recover, and whether the drawdown has grown over time. A provider with a 60% return and a 55% drawdown is showing you what a bad month could do to your own account.

Drawdown duration matters too. A 15% drawdown that recovers in three weeks is far easier to live with than one that lasts eleven months, even though the percentage is the same.

How to Limit Drawdown: Practical Rules

The most effective way to limit drawdown is to cap the risk on every trade and on every day, then cut position size when the account is already in a drawdown. These rules work on any account.

1. Risk a fixed percentage per trade, commonly 0.5% to 2%, sized from the stop loss distance.

2. Set a personal daily loss limit, such as 3%, and stop trading for the day when it is reached.

3. Watch correlation: three long positions on EURUSD, GBPUSD and AUDUSD behave like one large bet against the dollar.

4. Reduce risk per trade after a set drawdown, for example halving it once the account is 10% below its peak.

5. Review the strategy, not just the trades, if the drawdown passes the worst level seen in testing.

Write the limits down before you start trading on a trading account, and check equity rather than balance when you measure them. A daily limit that counts only closed trades will not stop a floating loss from getting out of hand.

Common Drawdown Mistakes Traders Make

The most common drawdown mistake is increasing position size to win back losses faster. Doubling risk after a 15% drawdown turns an ordinary losing streak into an account-ending one, and the recovery maths only gets worse as the hole deepens.

The second mistake is judging a strategy by balance drawdown alone. A system that never closes a losing trade can show a smooth balance curve right up to the day a margin call closes everything at once.

The third mistake is expecting live drawdown to match backtest drawdown. Live trading adds slippage, spread changes and the trader's own decisions, so plan for a live maximum drawdown worse than anything seen in testing.

Keeping Drawdown Within Limits You Can Survive

Drawdown in trading is the peak-to-trough decline in your account, and it comes in several forms: maximum drawdown in money, relative drawdown in percent, absolute drawdown below your deposit, and daily drawdown limits set by funded-account rules. Equity-based figures matter more than balance-based ones, because equity is what your account actually has at risk.

The recovery maths makes the priority clear. Keep risk per trade small, cap daily losses, cut size in a drawdown and measure strategies by how deep and how long their worst declines were. A strategy you can stay with through its drawdowns is worth more than a better-looking one you abandon at the bottom.