Stage 3: Execution and Risk · Module 8: Risk Management and Position Sizing · Lesson 7 of 9 · Back to course
A drawdown is how far your account has fallen from its highest point. Every trader has them. What matters is how deep they get, because the deeper the hole, the steeper the climb out. This lesson shows the maths behind that, and how loss limits keep drawdowns to a size you can recover from.
What you’ll learn
- How to measure drawdown properly (from the peak, not the start)
- The recovery table: why a 50% loss needs a 100% gain
- How long recovery can take, even with an edge
- Daily, overall, static and trailing loss limits
- How to plan your response to a drawdown before it happens
Measuring drawdown
Drawdown is measured from your peak balance (or equity), not from what you started with.
Example (illustrative):
| Balance | Drawdown from peak | |
|---|---|---|
| Start | £5,000 | – |
| New peak | £5,400 | 0% |
| After a losing run | £4,860 | £540 = 10% |
| Partial recovery | £5,130 | £270 = 5% |
Notice that at £5,130 you’re still up on your starting balance, but 5% down from your peak. Tracking from the peak gives a truer picture of how your method is doing right now.
Your maximum drawdown is the deepest drawdown you’ve had over a period. It’s one of the most useful numbers in your journal, because it tells you what you actually had to sit through.
The recovery table
Because you’re recovering from a smaller balance, the percentage gain needed is always bigger than the percentage lost:
Gain needed = loss ÷ (1 − loss)
| Drawdown | Gain needed to get back to the peak |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
Up to about 10–15%, the difference is small. Beyond 20–30%, it gets ugly fast. A 50% drawdown on a £5,000 account leaves £2,500, which has to double to get back.
How long recovery can take
Suppose you have a genuine edge of +0.2R per trade (see expectancy) and risk 1% a trade. On average, each trade adds roughly 0.2% to your account. In a perfectly average world:
| Drawdown | Gain needed | Average trades to recover (at +0.2% a trade) |
|---|---|---|
| 10% | 11.1% | about 53 |
| 20% | 25% | about 112 |
| 30% | 42.9% | about 179 |
| 50% | 100% | about 347 |
Our own calculation, assuming steady compounding at the average. Real results are lumpier and recovery can take much longer – or not happen at all.
If you trade a few times a week, a 30% drawdown could take well over a year to recover, even with an edge. That’s a long time to keep following a plan that’s been losing.
Why risking more doesn’t fix a drawdown
When you’re in a hole, it’s tempting to increase size to get out faster. The maths works against you. Bigger risk means bigger swings in both directions, so you’re more likely to make the hole deeper before you climb out. This is why many traders do the opposite: cut risk during a drawdown and only return to normal size once they’ve recovered some of it.
Loss limits: daily and overall
Loss limits put a hard floor under how bad things can get. There are two main types:
- Daily loss limit: the most you’ll lose in a single day before you stop.
- Overall (maximum) loss limit: the most you’ll lose from your starting balance or peak before you stop trading the account and review everything.
Prop firm challenges use both, and they define them in different ways (see how prop challenges work). You’ll see two styles:
- Static drawdown: the floor is fixed, for example 10% below the starting balance.
- Trailing drawdown: the floor follows your highest balance (or equity) up, so profits raise the floor.
Example (illustrative): £10,000 account with a £1,000 maximum loss.
- Static: the floor stays at £9,000, however much you make.
- Trailing: if you reach £10,600, the floor moves up to £9,600. A fall back to £9,600 ends the account – even though that’s only £400 below where you started.
Trailing limits are tighter than they look, because early profits don’t give you as much breathing room as you might think.
For your own trading, you can set personal versions of both. We do that step by step in Lesson 8.9.
Trailing vs static drawdown in prop accounts
Many futures prop firms measure drawdown from your highest balance, not your starting balance – a trailing drawdown.
Hypothetical: $50,000 account, $2,000 limit.
| Event | Balance | Static floor | Trailing floor |
|---|---|---|---|
| Start | $50,000 | $48,000 | $48,000 |
| Good week: new high | $51,200 | $48,000 | $49,200 |
| Two losing days | $50,100 | $48,000 | $49,200 |
| Room left | $2,100 | $900 |
Under a trailing rule, a drawdown that would be ordinary on a static account can end the challenge. With intraday trailing, even open profit you give back moves the floor. See 1F.10 Futures prop rules.
Plan your response in advance
Decisions made in the middle of a drawdown are usually emotional. Write a simple ladder into your trading plan now:
| Drawdown from peak | Action (example) |
|---|---|
| 5% | Review your last 20 trades. Are you following the plan? |
| 10% | Halve your risk per trade until you’re back within 5% of the peak. |
| 15% | Stop live trading. Go back to demo and review the method. |
| 20% | Full review before any more live trading. Is the edge still there? |
These levels are an illustration, not a recommendation. Set yours to suit your own risk and method.
The losing streaks lesson in our psychology section covers the emotional side of this.
Key takeaways
- Measure drawdown from your peak, not your starting balance.
- Gain needed = loss ÷ (1 − loss). A 50% loss needs a 100% gain.
- Even with an edge, deep drawdowns can take a very long time to recover – or may not recover.
- Daily and overall loss limits stop a bad patch turning into a disaster. Trailing limits are tighter than they look.
- Decide your drawdown responses before you need them.
Quick check
- You fall from a peak of £8,000 to £6,800. What’s the drawdown?
- What gain do you need to recover from a 30% drawdown?
- With a trailing limit of £1,000 on a £10,000 account, where’s the floor if your peak is £10,400?
Answers: 1) £1,200 = 15%. 2) About 42.9%. 3) £9,400.
FAQs
What’s a “normal” drawdown? It depends on your method and risk. At 1% risk per trade, drawdowns of 10% or more are entirely possible with a sound method. At 3–5% risk, much deeper ones become likely.
Should I measure drawdown on balance or equity? Equity includes open trades, so it’s stricter and closer to how most prop firms measure it. Balance is simpler. Pick one and be consistent.
Is it ever right to stop trading a method? Yes. If a drawdown goes well beyond anything in your testing, or your journal shows the edge has disappeared, stopping to review is sensible, not weak.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.