A drawdown is the fall in your trading account from its highest point (the peak) to its lowest point afterwards (the trough), usually measured as a percentage. If your account grows to ₹1,20,000 and then slides to ₹96,000 before recovering, you went through a 20% drawdown, even if you later make it all back.
How is a drawdown measured?
Always from the peak, not from where you started. Kavita began the year with ₹1,00,000. By June her account had grown to ₹1,25,000. A rough patch then took her down to ₹1,00,000 by August.
Measured from her starting capital, Kavita is at breakeven. It doesn't feel like a disaster. But her drawdown is ₹25,000 from a ₹1,25,000 peak: 20%. That is the number that matters, because it measures the experience she actually lived through (watching a quarter-lakh of real gains evaporate) and it is the number that tests whether her risk habits hold up under pressure.
Two related terms you will meet: maximum drawdown is the deepest peak-to-trough fall your account has ever had, and recovery (traders sometimes say "making a new high") is when the account climbs back above the old peak.
Why are deep drawdowns so hard to climb out of?
Because after a fall, every gain is earned on a smaller base. The percentage needed to recover is always larger than the drawdown itself, and it grows viciously:
| Drawdown from peak | Gain needed to recover the peak |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 33% | 50% |
| 50% | 100% |
| 70% | 233% |
A 10% drawdown needs an 11% gain. The kind of ground a patient trader can regain. A 50% drawdown needs a 100% gain: you must double what's left. And a trader desperate to double their money quickly tends to take exactly the oversized risks that caused the hole, which is how deep drawdowns so often deepen further.
There is a psychological tax too. Kavita in a 20% drawdown is not the same trader as Kavita at her peak. She hesitates on good setups, exits winners too early to "lock in something", and is tempted to skip her rules to speed up recovery. The maths and the mind both work against you at depth, which is why the practical goal is to stop drawdowns from getting deep in the first place.
How do traders keep drawdowns shallow?
Three habits do most of the work:
- Cap the loss per trade. If each losing trade costs about 1% of the account. A common convention, explained in what is position sizing?. Then even an ugly streak of eight straight losses is roughly an 8% drawdown, not a crater.
- Cut exposure during a losing streak. Many traders deliberately trade smaller after a string of losses, so the drawdown decelerates while they work out what's wrong. This is the heart of what is capital preservation?.
- Exit losers by rule, not by hope. Undefined exits are how single trades turn into personal bear markets. See why do experienced traders always use a stop-loss?
Note that none of this prevents drawdowns. Every trader who trades long enough has them, including professionals. The goal is shallow and recoverable instead of deep and demoralising.
Things to keep in mind
- Measure drawdowns from the peak, not from your starting capital. The peak is the honest yardstick.
- The recovery gain is always bigger than the drawdown; past roughly 30–40% the arithmetic becomes punishing.
- Drawdowns are normal. Plan for them in advance. Decide now what you will do after, say, a 10% fall, rather than improvising inside one.
- Rushing a recovery with bigger position sizes is the classic way a bad drawdown becomes a fatal one.
Read next
What is concentration risk? — The fastest route to a deep drawdown: too much riding on one thing.