In plain English
What Drawdown means
A drawdown begins when account equity falls below its latest peak and continues until equity recovers to that peak or reaches a new one. It can be calculated using closed results only, but risk monitoring commonly uses account equity so that losses on open positions are visible. The calculation method should be stated when comparing records or strategies.
Why it matters
Drawdown shows the size and duration of adverse performance an account has experienced. This can matter more operationally than an average return because a deep decline reduces funds available for future trades and, in a leveraged account, may move equity closer to margin requirements or liquidation thresholds.
Example
An account reaches $12,000, then falls to $10,800 before recovering. Its drawdown at the low is $1,200. Percentage drawdown is $1,200 ÷ $12,000 = 10%. If the account later rises to $12,300, the prior drawdown has recovered and the new peak becomes $12,300. Values are simplified and exclude transaction costs.
Quick answers
Common questions
Is drawdown always calculated from account balance?+
No. It may be calculated from balance, equity, or a strategy’s net asset value. Equity-based drawdown includes open-position gains and losses, while balance-based drawdown generally changes only after positions are closed.
Can an account be in drawdown while it has a profitable open trade?+
Yes. The account can remain below an earlier peak even if its current open trade is profitable. Drawdown depends on the current account value relative to the highest previous value.
Sources