What is drawdown in forex?
Drawdown measures how far your account has fallen from its highest point. It matters because the climb back is always steeper than the fall.
For information only, not financial advice. Trading carries a high risk of loss. Results depend on the values you enter and on your broker's contract specifications. Risk disclosure
The short answer
Drawdown is the percentage your account has fallen from its peak. If an account grows to $12,000 and then falls to $9,000, the drawdown is ($12,000 - $9,000) / $12,000 = 25%. It is measured from the highest point reached, not from the starting balance.
Drawdown versus a single loss
One losing trade is a loss. Drawdown is the total fall from the peak across however many trades it takes, so a string of small losses can add up to a deep drawdown. The deepest fall over a period is called the maximum drawdown, and it is a common way to describe how rough a trading approach has been.
Why recovery needs a bigger gain
After a loss, your balance is smaller, so the same percentage gain adds less money. To get back to even you need a gain of 1 / (1 - loss) - 1.
| Drawdown | Gain needed to recover |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 75% | 300% |
Take the $12,000 to $9,000 example: you need $3,000 more, which is 33.3% of the $9,000 you have left, not 25%. The deeper the hole, the faster the cost of climbing out rises, which is why keeping drawdowns shallow matters more than it first looks.
Balance drawdown and equity drawdown
- Balance drawdown counts closed trades only.
- Equity drawdown also counts the open profit or loss of running trades, so it can be deeper than the balance figure while trades are open.
- Prop firms and brokers often watch equity, so a trade that dips a long way before recovering can still break a rule.
How losing streaks build a drawdown
If you risk a fixed percentage of the current balance on each trade, a streak of losses shrinks the account by a predictable amount. After ten losses in a row, risking 1% each time leaves 0.99 to the power of 10 = 90.4% of the balance, a drawdown of 9.6%. At 2% it is 18.3%, and at 5% it is 40.1%. The drawdown recovery calculator has a losing streak mode that does this sum for you.
Drawdown limits in prop firm challenges
Funded account challenges usually set a daily loss limit and a maximum loss limit. Typical figures are around 5% a day and 10% overall, but they vary by firm and programme and are measured in different ways (balance or equity, from the day's start or from the highest point). Read the current rules and test your plan with the prop firm challenge calculator.
What you can do about it
- Risk a small, fixed percentage per trade, so no single streak is deep. The position size guide shows how.
- Set a daily loss limit and stop when it is reached.
- Judge a plan by its worst drawdown as well as its average result, and ask whether you could live with that drawdown.
- Estimate your chance of a deep drawdown with the risk of ruin calculator.
For information only, not financial advice. Past drawdowns do not predict future ones, and trading carries a high risk of loss.
Frequently asked questions
+What is drawdown in simple terms?
The percentage your account has fallen from its highest balance (or equity) to its current or lowest value since then.
+What is maximum drawdown?
The largest peak-to-trough fall over a period. It is a common way to describe how rough a trading approach has been.
+Why does a 50% loss need a 100% gain?
Because the gain is measured on a smaller balance. $10,000 falling 50% leaves $5,000, and you need to double that $5,000 to get back to $10,000.
+What is the difference between balance and equity drawdown?
Balance drawdown counts only closed trades. Equity drawdown also counts open profits and losses, so it shows deeper dips that happen while trades are still running.
+What drawdown limits do prop firms use?
Rules vary by firm and programme. Typical ones are a daily loss limit of around 5% and a maximum loss of around 10%, but always read the current rules.