Glossary
Drawdown
Drawdown is the decline in account equity from a peak to a subsequent low, usually expressed as a percentage. If an account grows to $10,000 and falls to $8,500 before recovering, that is a 15% drawdown. Maximum drawdown — the deepest such fall — is the standard measure of how much pain a strategy inflicts on the way to its returns.
Drawdown matters more than most metrics because it determines survival. Recovery is nonlinear: a 20% drawdown needs a 25% gain to break even, and a 50% drawdown needs 100%.
Prop firms typically enforce hard drawdown limits (both daily and overall), which is why journaling drawdown behavior — not just P&L — is essential for evaluation traders. Two traders with identical profits are not equal if one routinely rides deep underwater equity.
Related terms