A drawdown is the fall from a peak in your account to a later low. It is the number that tells you how much a strategy can hurt, and it behaves in ways that surprise people.
Recovery is not symmetrical
If you lose 10%, you need to make about 11.1% to get back to even. Lose 20% and you need 25%. Lose 50% and you need 100%. The deeper the hole, the steeper the climb:
- 10% loss ‚Üí 11.1% gain to recover
- 20% loss ‚Üí 25%
- 30% loss ‚Üí 42.9%
- 50% loss ‚Üí 100%
Work out your own numbers with the free drawdown calculator.
Losing streaks happen
Even a good strategy has runs of losses. Risking 1% of the remaining balance, ten losses in a row leaves you about 9.6% down. Risking 5%, the same ten losses leave you about 40% down. That difference is the reason small risk per trade is so strongly recommended.
Set limits before you need them
Write down limits in advance, when you are calm:
- Daily loss limit: for example, stop for the day after losing a set percentage of the account.
- Weekly loss limit: a larger figure that triggers a pause and a review.
- Maximum open risk: the most you will have at risk across all open trades at once.
- Maximum drawdown: the point at which you stop trading real money and go back to demo while you work out what is wrong.
Honour them
A limit you do not obey is decoration. The moment you most want to break it, after a loss, is the moment it matters most. Many traders remove the temptation by physically closing the platform when a limit is reached.