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🧱 Basics·intermediate

Drawdown

The peak-to-trough drop in your account equity — a measure of how bad your worst losing streak got.

Drawdown measures how much your account has fallen from its highest point. If your account peaks at $10,000 and drops to $8,500, that's a 15% drawdown. Drawdown is how we measure pain in trading — not how much you made, but how much you gave back from your best moment. Every trader has drawdowns. Even the best in the world go through 20-30% drawdowns in bad seasons. The goal isn't zero drawdown — it's to stay small enough that the drawdown is survivable and the system can recover without changing anything. Two numbers matter: max drawdown (the worst you've ever had) and current drawdown (how far you are from your peak right now). Prop firms use these to judge traders. 10% max drawdown is tight. 20% is loose. 50%+ means the system is broken.

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Real trade example

Paul Tudor Jones, one of the best macro traders ever, has been 20%+ in drawdown multiple times in his career. Drawdowns are not failure — they're the cost of being in the game.

Frequently asked about drawdown

What is a drawdown in trading?+
The peak-to-trough drop in your account equity — a measure of how bad your worst losing streak got.
When will I see drawdown used in real trading?+
Every prop firm challenge has a max drawdown rule — blow it and you fail. Every serious journal has a drawdown tracker.
What is the most common mistake traders make with drawdown?+
Panicking at 5% drawdown and abandoning your system. Small drawdowns are normal. The system only breaks at 2x your historical max.
What do experienced traders know about drawdown that beginners don't?+
Know your historical drawdown before you trade live. If backtesting shows a 15% max drawdown, expect live to be closer to 20%. Size accordingly so a bad streak doesn't end you.

Related terms

Equity

beginner

Balance plus or minus your current floating P&L — what you'd have if you closed every trade right now.

Position Sizing

beginner

The math that tells you how many lots to trade based on your account, stop distance, and risk tolerance.

Max Drawdown

intermediate

The largest peak-to-trough decline in account equity over a measured period — the worst losing streak you've ever had.

Currency Pair

beginner

Two currencies quoted together — you're always buying one and selling the other at the same time.

Long

beginner

Buying something expecting its price to go up — the most basic bullish position in any market.

Short

beginner

Selling something expecting its price to go down — the bearish opposite of going long.

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