What is drawdown?
Maximum drawdown is the largest peak-to-trough fall an account experiences before recovering. It measures the worst stretch you could have lived through if you had invested at the worst possible moment.
If an account grows to $12,000, falls to $9,000, then climbs back, the maximum drawdown is 25%. It is not the loss you ended with. It is the loss you had to sit through on the way.
This is the number most traders hide and most investors forget to ask for. Return gets the headline; drawdown decides whether you are still invested to collect it.
Why does drawdown matter more than return?
Because recovery is not symmetrical, and the mathematics are brutal.
Losing 50% does not require a 50% gain to get back. It requires 100%. The deeper the hole, the more disproportionate the climb out:
| Drawdown | Gain needed just to recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
| 70% | 233% |
A strategy that drops 50% has to double from the bottom simply to return to where it started. That is why capital preservation is not a conservative preference, it is arithmetic. Avoiding the deep hole is worth more than any clever entry.
There is a second reason, and it is human rather than mathematical. Most investors do not survive a deep drawdown emotionally. They withdraw near the bottom, converting a temporary paper loss into a permanent one, and never participate in the recovery that would have justified the strategy. A 20% drawdown you can sit through beats a 45% drawdown you abandon.
What counts as an acceptable drawdown?
There is no universal answer, but there are useful reference points:
- Under 10% — tight risk control, usually with more modest returns.
- 10% to 20% — normal for an actively managed strategy.
- 20% to 35% — aggressive; you need conviction and a long horizon.
- Above 40% — the strategy is either taking very large risks or has no real risk management. Treat any figure here as a warning, whatever the return beside it.
Judge the number against the return that came with it. A 15% drawdown producing 20% a year is a very different proposition from a 15% drawdown producing 4%. That relationship between risk taken and reward earned is exactly what the Sharpe ratio is designed to express, which is why the two numbers belong together.
What questions should you ask about a drawdown figure?
A 12% maximum drawdown across three calm months means nothing. Across three years including a market shock it means a great deal.
Some reports only sample month ends, which hides a deep mid-month fall that fully recovered before the month closed. Your money experienced that fall even if the report does not show it.
Depth is only half the story. A 20% drawdown recovered in six weeks is very different from a 20% drawdown that took two years. The second one ties up your capital and your patience for far longer.
A drawdown figure from a manager's own spreadsheet is a claim, not evidence. Independent tracking platforms calculate it from the broker's data.
Is drawdown the same as a loss?
Not quite, and the distinction trips up a lot of investors.
A drawdown is a fall from a previous peak, and most of it is unrealised: the positions are still open and the money has not left the account. If the strategy recovers, that drawdown becomes a line on a chart and nothing more.
A realised loss is different. It is booked, permanent, and no recovery undoes it.
The reason this matters is that investors turn the first into the second. Seeing a 20% drawdown, they withdraw, and at that moment an unrealised fall becomes a permanent loss. The strategy might recover the following month, but they are no longer in it. Understanding that a drawdown is a stage rather than an outcome is what allows people to stay invested long enough for the strategy to work.
How do you use drawdown to size your position?
Work backwards from the loss you can genuinely tolerate.
If a strategy has historically drawn down 20%, and you would be forced to withdraw after losing $5,000, then your allocation should be around $25,000 at most, because a repeat of that historical drawdown would cost you exactly $5,000. Size the position so the worst realistic case is survivable, then you are never making decisions under pressure.
And expect the historical maximum to be exceeded eventually. It is the worst that has happened so far, not a limit. Any manager presenting past drawdown as a ceiling is misunderstanding their own number, or hoping you will.
TIC enforces strict drawdown limits in risk management, and our strategies' drawdown figures are published on Myfxbook for anyone to inspect. How to read a Myfxbook track record shows where to find them, and if you are deciding how much to commit, how much capital you actually need covers sizing in more detail.
trading carries high risk and you may lose your capital. Past performance does not guarantee future results. Educational content only, not investment advice.
Verify any trader's results in 10 minutes
Seven checks that reveal whether a track record is real: third-party verification, maximum drawdown, trade count, and the martingale warning signs. Use it on anyone — including on us.
We'll send the checklist plus occasional TIC insights. We never share your email, and you can unsubscribe any time.
