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Drawdown
The percentage decline from the account’s previous equity peak.
Lesson · Trading Risk Management
Losing Streaks and Drawdown
Measure peak-to-trough decline, compute the gain required to recover it, and distinguish normal strategy variance from unacceptable account damage.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
2
Maximum drawdown
The largest observed peak-to-trough decline in the sample.
3
Recovery requirement
The percentage gain needed from the reduced balance to regain the prior peak.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Losing Streaks and Drawdown Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Track the equity peak
Drawdown is measured from the highest prior equity.
Measure depth and duration
A shallow but long drawdown can still challenge execution discipline.
Compare with expectations
Risk should remain survivable under worse-than-average sequences.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. Drawdown is measured from:
Each decline is measured relative to the highest equity reached before it.
2. A 20% drawdown requires what approximate gain to recover?
An account at 80% of its peak needs 25% to return to 100%.
3. Why simulate outcome order?
The same set of outcomes can create different drawdowns depending on order.
4. Equity peaks at $60,000 and falls to $51,000. What are the drawdown and the gain needed to recover?
Drawdown = ($60,000 − $51,000) ÷ $60,000 = 15%. Recovery = $9,000 ÷ $51,000 = 17.6%, which is 1 ÷ (1 − 0.15) − 1.
Practical rules
- Track drawdown in both percentage and R.
- Define a maximum acceptable drawdown before live trading.
- Reduce or stop risk when the observed drawdown exceeds the tested range.
Common mistakes
- Measuring only total return.
- Assuming wins and losses will alternate.
- Increasing size while below the equity peak.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
CME Group · Controlling Risk
Shows how loss percentages create larger recovery requirements.