Maximum drawdown is the largest drop your account balance or equity has taken from a peak to a subsequent low point, expressed as a percentage. It's the number that answers a question average risk metrics can't: in the worst stretch of your trading history, how much did you actually lose before recovering?
The Maximum Drawdown Formula
Max Drawdown = (Trough Value − Peak Value) ÷ Peak Value × 100
Find the highest equity point your account reached (the peak), then find the lowest point it fell to afterward before making a new high (the trough). The percentage decline between those two points is your maximum drawdown.
A Worked Example
Your account grows to a peak of $10,000, then goes through a losing stretch that takes it down to $8,200 before recovering. Max Drawdown = ($8,200 − $10,000) ÷ $10,000 × 100 = -18%. Even if your account later grows to $15,000, that 18% drawdown remains part of your historical record — it measures the worst period you actually lived through, not where you ended up.
Why Maximum Drawdown Matters More Than Average Risk
A strategy can have a small average loss per trade and still produce a brutal maximum drawdown if losses cluster together — a losing streak, a period of high volatility, or a correlated set of trades moving against you at once. Average risk per trade tells you what a typical trade costs; maximum drawdown tells you what your worst realistic stretch actually looks like, which is the number that determines whether you can psychologically and financially survive it.
Drawdown Duration Matters Too
Two strategies can have identical maximum drawdown percentages with very different recovery times — one bounces back in a week, another takes three months. A drawdown you can recover from quickly is a very different experience, financially and psychologically, than one that drags on. Track how long your account spent underwater, not just how deep it went.
Drawdown in Prop Firm Challenges
If you're trading a funded evaluation, maximum drawdown isn't just a performance metric — it's a hard rule that can end your challenge if breached. The mechanics of Daily and Maximum Loss Limits work differently from the general drawdown measure covered here; our full breakdown of FTMO drawdown rules covers exactly how those limits are calculated and the most common ways traders breach them.
Know Your Drawdown Before It Becomes a Problem
LedgerPips tracks your equity curve and drawdown in real time from your synced MT4/MT5 account, so you see the number as it happens — not after reconstructing it from memory or a spreadsheet.
Conclusion
Maximum drawdown measures your worst realistic stretch, not your average day — which makes it one of the most honest risk metrics available. Track it continuously, not just after the fact, and pay attention to recovery time alongside depth.
