Maximum drawdown is the deepest hole a strategy has dug: the largest fall from an equity peak to the trough that followed, before a new peak was made. It is the single number that tells you how bad the worst stretch actually got. An account can end the year up and still have a brutal max drawdown buried in the middle — and that buried figure, not the tidy end balance, is what decides whether a strategy survives a prop-firm limit or a nervous month.
What it is
Drawdown is any fall from a high-water mark. Maximum drawdown is the worst of all of them across the record — the biggest peak-to-trough drop measured before equity climbs to a fresh high. It is usually quoted as a percentage of the peak it fell from, sometimes in currency.
- Current drawdown — how far below the last peak you are right now.
- Maximum drawdown — the deepest that fall has ever been.
The two are easy to confuse. A dashboard flashing a calm 2% current drawdown can sit on a history whose max drawdown was 38%.
How it works
Maximum drawdown = largest (peak − trough) ÷ peak, across the whole record
Walk the equity curve left to right. Each time it makes a new high, that becomes the peak. Measure the fall to the lowest point before the next new high, as a fraction of that peak. The biggest such fall is the maximum drawdown. Measure it on equity, which includes open trades, not on balance, which only moves when trades close. Equity is the honest one, because it shows the floating losses a strategy is carrying right now.
A worked example
An account runs like this: it starts at £10,000, climbs to a peak of £12,000, slides to £9,000, recovers to a new peak of £15,000, then dips to £13,500.
- First fall: £12,000 → £9,000 = £3,000, or 25% of the £12,000 peak.
- Second fall: £15,000 → £13,500 = £1,500, or 10% of the £15,000 peak.
The account finished at £13,500, up 35% on where it started, yet its maximum drawdown is 25% — the worst of the two falls. The green end balance tells you nothing about that. Now suppose the £9,000 low happened with open trades still bleeding: balance drawdown might read a mild few per cent because nothing was booked, while equity drawdown was the full 25%. Trust the equity figure.
Why it matters
Maximum drawdown is the number your risk budget and your nerve are measured against. Most prop firms fail an account at a fixed drawdown — often 10%, frequently checked on equity, sometimes intraday. A strategy with a 25% historical max drawdown cannot pass a 10% limit; it will breach on its first ordinary bad run. It also sets your recovery maths: a 25% fall needs a 33% gain to get back to level, and a 50% fall needs 100%. The deeper the hole, the more the recovery costs you.
Common misconceptions
- A blended headline hides the worst account. A portfolio page that averages five accounts can smooth a 45% collapse on one into a comfortable 12% blended figure. The blown account is still blown; the average just dressed it up.
- It is historical, not a ceiling. Max drawdown is the worst so far, not the worst possible. Next month's can be deeper, and for martingale or grid systems it usually is.
- Balance drawdown flatters. Quoting drawdown on balance ignores open losers, so a basket of floating losses can leave balance drawdown looking tame while equity is deep underwater.
- Percentage and currency are not the same story. A 20% drawdown on £5,000 and on £500,000 read identically as a percentage and mean very different things to the person living it.
The Karnek note
Karnek tracks equity drawdown — open trades included — for each account separately, computed on the live terminal so the figure is real rather than a smoothed portfolio average. The window is labelled, and you can set a drawdown limit and get alerted at 80% and 90% of it, before a breach rather than after. It only ever reads: it can watch the hole deepen, but never trade or touch the account.
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.