Drawdown
The decline from an account's peak to its trough - the number that measures risk actually realised.
The decline from an account's peak to its trough - the number that measures risk actually realised.
Return tells you what you earned; drawdown tells you what it cost to earn it. It is measured peak-to-trough on equity: if your balance climbs to $12,000 and falls to $9,000, the drawdown is 25%, regardless of where the account started. Because losses compound asymmetrically - a 25% loss needs a 33% gain just to recover - drawdown is the metric that decides whether a strategy survives long enough to work.
Two versions matter: closed-trade drawdown, which ignores floating positions, and equity drawdown, which includes them. Strategies report the second only when the first looks better, so ask which one is quoted. For prop-firm evaluations the question is moot: those rules track intraday or end-of-day equity against a fixed threshold, and breaching it ends the account, not just the month.
Worked example
A strategy returns 40% over a year but passes through a 30% drawdown on the way. Recovering that 30% takes about 43% on the remaining capital - more than the entire first-half gain - which is why a smoother equity path often beats a higher headline return.
Related terms and tools
Risk-reward ratio, Trailing drawdown, Risk of Ruin Calculator
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