What it is
Drawdown is the largest peak-to-trough decline your account has experienced over a given period. If your balance grew to £1,200 and then fell to £900 before recovering, your drawdown was £300 — or 25%. It tells you the worst losing stretch the strategy has gone through historically.
Drawdown is arguably the most important risk metric in trading. Understanding it properly is what separates traders who survive losing periods from those who don't.
How it works
Drawdown is always measured from a peak (the highest point your balance reached) to a subsequent trough (the lowest point before a new high is made). It's expressed as a percentage of the peak balance.
Types of drawdown
- Maximum drawdown (Max DD): The largest single peak-to-trough decline ever recorded. This is the number shown on Myfxbook and backtest reports.
- Current drawdown: How far below the current peak your account sits right now.
- Relative drawdown: Expressed as a percentage of the starting or peak balance.
- Absolute drawdown: The largest loss from your original starting balance (not from a peak).
A worked example
An EA runs on a £1,000 account over six months:
- Month 1: Balance grows to £1,150 (new peak)
- Month 2: Falls to £950 (trough — £200 below peak)
- Month 3: Recovers to £1,100
- Month 4: Falls to £920 (trough — £230 below the £1,150 peak)
- Month 5–6: Recovers to £1,250
Maximum drawdown = £1,150 − £920 = £230 = 20% of the £1,150 peak
This doesn't mean the account lost 20% overall — it means the worst losing period was a 20% decline from the high point.
The recovery problem: Losses are asymmetric. To recover from a 25% drawdown, you need a 33% gain. To recover from a 50% drawdown, you need a 100% gain. The deeper the drawdown, the harder it is to recover.
- 10% loss → need +11.1% to recover
- 25% loss → need +33.3% to recover
- 50% loss → need +100% to recover
- 75% loss → need +300% to recover
Why it matters
Drawdown tells you two things: how painful the strategy has been to hold through, and roughly how painful it could be in future. An EA with a 50% maximum drawdown means your account could halve in value before recovering — or before it stops recovering altogether.
Drawdown also determines whether you can psychologically stick with a strategy. A 30% drawdown on a live account feels very different from seeing it on a backtest chart. Many traders abandon strategies during normal drawdown periods — exactly the wrong moment — because they didn't understand what they were signing up for.
For prop firm traders, drawdown is the number that gets you disqualified. Breach your maximum drawdown limit and the challenge is failed.
Common misconceptions
- Drawdown doesn't tell you about total losses. A strategy can have a 40% drawdown but still be net profitable overall. Drawdown measures the worst losing stretch, not the overall outcome.
- A low drawdown isn't automatically good. Some low-drawdown strategies achieve their numbers by closing losing trades very late (or never) — a technique sometimes used to game backtest statistics. Always look at how the drawdown was achieved, not just the number.
- Historical drawdown underestimates future drawdown. Whatever the worst drawdown in the backtest was, live trading will likely produce a deeper one eventually. Markets change. A 15% historical max DD might become 30% in live conditions.
The Karnek note
Karnek is read-only monitoring for MetaTrader - it watches every account you run, live on one dashboard, and alerts you the moment something stops. It never trades and never asks for a trading password.
Written and reviewed by the Karnek Research team. Last updated August 2026.
Educational content only - not financial advice. Past performance does not predict future results. Trading carries significant risk.