Maximum Drawdown — Understanding Your Worst Case

What is Drawdown?

Drawdown measures the peak-to-trough decline in your equity curve. It answers the question: "What was the worst losing streak or sequence of losses I experienced?"

Maximum Drawdown (MDD): The largest peak-to-trough decline over a given period, usually expressed as a percentage.

Example: Account goes from $20,000 to $14,000 before recovering. Drawdown = $6,000 = 30% MDD.

Why Drawdown Matters More Than You Think

Most traders focus on returns. Professionals focus on drawdown. Here's why:

A 50% drawdown requires a 100% return just to break even.

• $10,000 drops to $5,000 (50% loss)
• Need to make 100% just to get back to $10,000

A 20% drawdown only requires a 25% return to recover.

• $10,000 drops to $8,000 (20% loss)
• Need to make 25% to get back to $10,000

The asymmetry of losses means that capital preservation — keeping drawdowns small — is mathematically more important than chasing large gains.

Types of Drawdown

Daily Drawdown: The maximum loss in a single trading day. Most prop firms set daily drawdown limits (e.g., 5% of account).

Max Drawdown: The largest equity decline from peak to trough across the entire period.

Drawdown Duration: How long it took to recover from the drawdown to a new equity high. A system might have an acceptable MDD but an unacceptably long recovery period.

What's an Acceptable Drawdown?

This depends on your strategy, but general benchmarks:

• Prop firm challenges: Usually allow 5–10% max drawdown
• Personal accounts: Many professional traders target < 10% MDD
• High-frequency strategies: Often target < 5% MDD
• Trend following: Can have 20–30% MDD with excellent long-term returns

The key question: Can you emotionally and financially handle this drawdown and keep trading? If a 15% drawdown would cause you to abandon your system, then 15% is too much — regardless of whether it's mathematically fine.

Viewing Drawdown in Tradapt

Your equity curve in Tradapt shows drawdown periods visually. The Analytics section provides your maximum drawdown percentage and current drawdown (if you're in one now). Use this to calibrate your position sizing — if your current MDD is higher than your target, reduce size until you recover.