Maximum drawdown
The largest peak-to-trough fall in account balance over a period.
Full explanation
If the account peaked at 10,000, fell to 8,500 and then recovered, the maximum drawdown was 1,500, or 15%. It measures the worst stretch you actually lived through, not the end result.
Drawdown matters more than return because it decides whether you are still trading when the strategy recovers. Losses also get harder to recover as they grow: a 20% drawdown needs 25% to get back, a 50% drawdown needs 100%.
Know the maximum drawdown your testing produced and expect the live version to be worse. If that number would make you abandon the plan, reduce risk per trade now rather than mid-drawdown.
Why traders watch it
Almost every account blow-up is a drawdown that was never planned for. Deciding your limit in advance is what keeps a losing run survivable.
Trading considerations
- Set a maximum drawdown at which you stop and review, and write it down.
- Assume the live drawdown will exceed the tested one.
- Reduce size during a drawdown instead of increasing it to win it back.
Educational guidance only — never a trading signal or recommendation.
Related indicators
Confirmation
Observable evidence, defined in advance, that a setup is doing what you expected before you commit.
Drawdown
Drawdown is the fall from an account's peak value to its subsequent low, expressed in money or as a percentage. It measures the pain of a losing run rather than the final result. A 20% drawdown needs a 25% gain to recover, and the deeper it goes the harder recovery becomes, which is why controlling drawdown matters more than chasing returns.
Entry
The point at which you open a position — chosen in advance, with a defined trigger and invalidation.
Risk-controlled plan
A plan where the loss on every trade, and for the day as a whole, is decided before the market opens.
Risk-to-reward ratio
The comparison of what you stand to lose against what you stand to gain on a trade, calculated before entry.
Stop loss
A pre-set order that closes a position once price proves the idea wrong, capping the loss.