Drawdown: How to Measure It Properly and What Level Is Acceptable
Absolute, maximum and relative drawdown, the difference between balance and equity drawdown, and why prop firms measure it differently.
Drawdown is the distance from an account peak to the trough that follows. It measures not how much you lost in total but how deep the holes were along the way.
Three kinds
Absolute. How far below the initial deposit the account fell.
Maximum. The largest fall from any peak to the following low. The primary metric for evaluating a strategy.
Relative. The same figure expressed as a percentage of the peak.
Balance versus equity
Balance drawdown counts only closed trades. A trader who never closes losers can display a flawless balance curve alongside catastrophic equity.
Which is why prop firms and professional managers measure drawdown on equity, in real time, including floating losses. When assessing someone else's track record, the first question is which of the two it is based on.
What counts as acceptable
Judge drawdown against return rather than in isolation.
| Annual return | Max drawdown | Verdict |
|---|---|---|
| 15% | 7% | good |
| 30% | 15% | good |
| 30% | 40% | poor |
| 100% | 60% | very risky |
A strategy returning 100% with a 60% drawdown means the account was at some point down by more than half. Repeating that two years running is near-impossible — sooner or later the drawdown coincides with a bad entry.
How to reduce it
The only reliable method is to cut per-trade risk. Drawdown scales with it almost linearly: halving risk from 2% to 1% roughly halves both drawdown and return. The second is usually acceptable; the first is almost always necessary.
Read next
Frequently asked questions
What is maximum drawdown?
The largest fall in equity from a peak to the subsequent trough over the whole period. It is the key characteristic of a strategy — it shows what you had to live through to earn the headline return.
What drawdown is acceptable?
It depends on return. A useful benchmark is an annual return to maximum drawdown ratio of at least 2:1. A strategy making 30% with a 40% drawdown is mathematically worse than one making 15% with a 7% drawdown.
How does equity drawdown differ from balance drawdown?
Balance counts only closed trades, so it hides floating losses. Equity drawdown is the honest figure — the one prop firms and professional managers use.
- Min. deposit
- $50
- Spread
- from 1.0 pip (Standard STP)
- Commission
- $3 per lot per side (Raw ECN)
CFDs are complex instruments with a high risk of losing money
- Min. deposit
- $100
- Spread
- from 1.2 pips
- Commission
- $3.5 per lot per side
72% of retail investor accounts lose money when trading CFDs