Drawdown
The peak-to-trough decline in account equity from a high point to the subsequent low before a new high is reached.
Formula
Drawdown% = (Peak Equity − Trough Equity) / Peak Equity × 100
Drawdown measures how far your account has fallen from its most recent peak. It tells you the psychological and financial cost of a losing streak — even a strategy with a strong long-run edge will experience extended drawdowns.
Expressed as a percentage: a $10,000 account that dips to $8,500 before recovering has experienced a 15% drawdown. Drawdown is not just about money — extended drawdowns erode discipline and lead traders to abandon good strategies at the worst time.
Example
Account peaks at $12,000, then loses six consecutive trades falling to $9,600. Drawdown = ($12,000 − $9,600) / $12,000 = 20%. The account must then gain 25% just to return to the high-water mark.
Related Terms
Calmar Ratio
A risk-adjusted return measure dividing annualized return by maximum drawdown, rewarding strategies that grow without deep equity dips.
IntermediateCapital Preservation
The principle of protecting trading capital above all else — because you cannot trade without capital, survival is the first objective.
BeginnerEquity Curve
A chart plotting account balance over time across all trades, showing the overall trajectory and drawdown periods of a trading strategy.
BeginnerExpectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediateGap Risk
The risk that a market reopens far from its prior close — jumping past your stop — so the actual exit is much worse than the level you set.
IntermediateMargin Call
A broker demand to deposit more funds immediately because account equity has fallen below the required maintenance margin level.
BeginnerMaximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
IntermediatePortfolio Heat
The total percentage of account capital currently at risk across all open positions simultaneously.
IntermediateRisk Capital
Money explicitly set aside for speculation that the trader can afford to lose in its entirety without affecting their financial wellbeing.
BeginnerRisk of Ruin
The statistical probability that a trader will lose enough capital to be forced out of trading entirely, given their edge and risk per trade.
AdvancedRisk Per Trade
The percentage or dollar amount of your account you are willing to lose on a single trade. Typically 0.5–2% for most traders.
BeginnerRisk Tolerance
The maximum level of financial loss and psychological discomfort a trader can absorb without deviating from their strategy.
Beginner