What drawdown is, and what level is acceptable

Drawdown is the fall from an equity peak to the following trough before recovery. It matters more
than profit when judging a strategy, because it tells you what you have to endure along the way.

1. Three ways to measure it

• Absolute drawdown — the fall in money terms from the peak.
• Relative drawdown — the same as a percentage. This is the figure to compare
  with.
• Maximum drawdown — the deepest fall in the whole record. This is what measures a
  strategy’s real risk.

2. Why it matters more than profit

Two strategies both making 40% a year: one with a maximum drawdown of 12%, the other 45%. On a
results table they look equal. In practice they are nothing alike.

At 45%, you will almost certainly abandon the strategy part way — not because it is wrong but
because people cannot watch an account halve. A strategy you cannot see through is a useless
strategy.

3. The arithmetic of recovery

• 10% drawdown → needs 11.1% to return to the peak
• 20% → needs 25%
• 30% → needs 42.9%
• 50% → needs 100%
• 70% → needs 233%

The curve goes vertical quickly. Which is why keeping drawdown in hand matters more than maximising
returns.

4. What level is acceptable

There is no right number for everyone, but there are useful markers:

• Under 10% — very conservative, suiting a large account or capital that must not
  be risked.
• 10–20% — the usual range for a disciplined retail strategy.
• 20–30% — acceptable if you have lived through it and know you can.
• Above 30% — reconsider your position size, not your strategy.

5. How long matters as much as how deep

A figure rarely mentioned: time to recovery. A 15% drawdown lasting two weeks is
nothing like a 15% drawdown lasting eight months. The second erodes confidence far more, for the same
number.

6. How to reduce it

• Reduce risk per trade. The most direct lever — drawdown scales almost linearly
  with size.
• Hold fewer correlated positions at once.
  Three trades in the same dollar direction lose together.
• Set a monthly stop threshold. Hit it and stop, which keeps a moderate drawdown
  from becoming a serious one.
• Cut costs. Cost is a steady
  deduction that stretches out every drawdown; reducing it shortens the recovery.

7. While you are in one

This is when mistakes come easiest. Three things not to do: raise size to recover faster,
change strategy mid-drawdown, and stop journalling. What to do instead: halve the size, keep the
process unchanged, and record more carefully than usual.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.