What Is Drawdown? Measuring Your Losing Streaks

Drawdown measures how far your account has fallen from its highest recent value, usually expressed as a percentage. It’s one of the key numbers used to judge how risky a trading strategy really is.

How it’s calculated

If your account peaks at $10,000 and later drops to $8,000 before recovering, that’s a 20% drawdown. Drawdown is measured from peak to trough — it resets each time the account reaches a new all-time high.

Why it matters more than a single trade’s loss

A strategy can have a great average win rate but still be very risky if it occasionally produces deep drawdowns. Drawdown captures the cumulative effect of a losing streak, which is often what actually forces traders out of the market — either financially or psychologically.

Recovering from drawdown gets harder

A key reason drawdown matters: losses and gains aren’t symmetric in percentage terms. A 20% drawdown requires a 25% gain just to break even, and a 50% drawdown requires a 100% gain. The deeper the hole, the disproportionately harder it is to climb out.

Using it to judge risk

When evaluating a trading strategy or a signal provider’s track record, maximum drawdown is often more informative than average returns, because it shows the worst realistic scenario you’d need to be able to tolerate.

Key takeaway

Keeping drawdown shallow — through position sizing and stop losses — matters more for long-term survival than maximizing any single trade’s potential gain.