What Is a Drawdown? (And How Much Is Too Much?)

Drawdown is the percentage drop from a previous account high to a subsequent low. If your account peaks at $10,000 and then drops to $8,500 before recovering, your drawdown was 15%. It doesn't matter if the account later climbs to $20,000 — that 15% drawdown is on the record forever, and it's a permanent measurement of how rough that particular losing stretch was. Why drawdown matters more than win rate or profit. Because drawdowns are when traders quit. A trader running an 80% win rate strategy can still hit a 30% drawdown during a normal losing streak — and most people, when they see their account down 30%, panic, abandon the system, and switch strategies right before it would have recovered. Drawdown is where psychology meets math, and it's where most edges die not because they don't work, but because the trader couldn't handle them. There are two ways to measure drawdown. Maximum drawdown is the largest peak-to-trough decline ever recorded on the account. Current drawdown is how far below the all-time high the account is right now. Backtests, prop firms, and trading journals all track both. When you hear "this strategy has a max drawdown of 12%," that means at its worst point in history, the account was 12% below its previous peak. What's an acceptable max drawdown? Depends on the strategy and the trader. Conservative strategies aim for 5-10% max. Standard retail strategies live in the 10-25% range. Aggressive strategies can hit 30-40% and still be "working" if expected returns justify it. Above 40% is usually a sign the strategy is too risky for the average human to actually trade — even if the math is profitable, most people will quit before they see the recovery. Prop firms typically enforce a 10% max overall drawdown and a 5% daily limit, which keeps traders honest. Here's the math nobody likes hearing. If you have a 50% drawdown, you need a 100% gain just to get back to break-even. A 30% drawdown needs about 43% to recover. A 10% drawdown only needs 11%. Drawdowns compound non-linearly, which is why pros obsess about keeping them small. The Candleread desk's hard rule: any time current drawdown exceeds 15%, stop trading and go back to backtesting. Either the strategy has stopped working or your execution has degraded — either way, the right move is to pause, not to push through.