Drawdown

Drawdown is the peak-to-trough decline in your account equity, expressed as a percentage. If your account reaches $10,000 and then drops to $7,500 before recovering, that's a 25% drawdown. It's one of the most important metrics for evaluating trading performance — arguably more important than total return.

Why drawdown matters so much: recovery math is asymmetric. A 25% drawdown requires a 33% gain to get back to breakeven. A 50% drawdown needs a 100% gain. And a 75% drawdown? You need a 300% return just to get back to where you were. This is why capital preservation is the first rule of professional trading.

Professional fund managers typically aim to keep maximum drawdown under 20%. For retail traders, even 30% should be a wake-up call that something needs to change in the strategy or risk management. Tracking your drawdown over time tells you more about your risk management quality than your profit numbers do.