What Is Drawdown in Trading? Meaning, Formula and Examples

Trading performance is rarely a straight line. An account may climb to a new high, fall as positions move against the trader, and later recover. Drawdown measures that decline from the account’s peak to a later low, making it a practical way to see how much capital was at risk along the way. Unlike a single losing trade, it can reflect the combined effect of several closed and open positions.

This guide explains what is drawdown in trading, how it is calculated, why recovery becomes harder after losses, and how leverage can increase risk in CFD trading.

Key Takeaways

• Drawdown measures the decline from a previous peak in account or portfolio value to a later trough or current value.
• Percentage drawdown is calculated by subtracting the trough from the peak, dividing by the peak, and multiplying by 100.
• Maximum drawdown is the deepest peak-to-trough fall recorded over a chosen period, while duration shows how long recovery took.
• Recovery is asymmetric: a 20% drawdown requires a 25% gain, while a 50% drawdown requires a 100% gain to regain the peak.
• In CFD trading, larger exposure relative to account equity can amplify drawdowns and increase pressure on available margin.
• Position sizing, leverage control, diversification, stop-losses and disciplined monitoring may limit drawdown risk but cannot eliminate it.

What Is Drawdown in Trading?

Drawdown is the monetary or percentage decline from a previous peak in an account, portfolio, asset or strategy to a later low or its current value. A complete drawdown period begins at the peak, reaches a trough and ends when value recovers to the former peak.

The peak, or high-water mark, is the highest value before a decline. The trough is the subsequent low, and the recovery point is where value returns to the former peak. A partial rebound does not end the drawdown.

Drawdown can apply to a position, account-equity curve, portfolio or strategy. It may be reported as cash, as a percentage for comparison, or as time spent below the peak.

A current drawdown is the fall from the latest peak to current value. Maximum drawdown is the largest observed peak-to-trough decline within a defined historical period.

An account can be profitable overall and still be in drawdown. If £10,000 rises to £14,000 and falls to £12,000, it remains above the deposit but is £2,000 below its peak.

Drawdown vs loss vs volatility

These terms describe different aspects of performance:

A drawdown may contain realised and unrealised losses. It is path-dependent: identical final returns can conceal different loss and recovery sequences.

How to Calculate Drawdown: Formula and Worked Example

The drawdown formula compares a peak with a lower value that follows it. Use a consistent data basis.

Dollar drawdown = Peak value − Trough value

Drawdown (%) = ((Peak value − Trough value) ÷ Peak value) × 100

Calculate it in four steps:

• Choose the period and decide whether you are measuring balance or equity, using intraday or closing values.
• Identify the highest value reached before the decline.
• Find the lowest value after that peak, or use current value for an ongoing drawdown.
• Subtract the low from the peak, then divide by the peak and multiply by 100 for the percentage.

Worked account example

Suppose an account follows this path:

Why recovery requires a larger percentage gain

Recovery is calculated from a smaller capital base:

Required recovery gain = Drawdown ÷ (1 − Drawdown)

Using the drawdown as a decimal, 0.20 ÷ 0.80 = 0.25. The account therefore needs a 25% gain to recover.

Always check the methodology before comparing figures. A maximum drawdown calculated from end-of-day balances is not directly equivalent to one based on live equity, including intraday floating losses.

Main Drawdown Types and Measurements

Each drawdown measurement answers a different question. Because platform terminology varies, check the definition behind a reported figure.

Current or ongoing drawdown

Current drawdown is the decline from the latest high-water mark to current equity or portfolio value. Its trough can change until recovery occurs.

Maximum drawdown (MDD)

Maximum drawdown is the largest peak-to-subsequent-trough decline observed during a stated period. It supports like-for-like historical comparisons but does not limit future losses.

Absolute drawdown

Absolute drawdown often means the fall below the initial deposit. A £10,000 account reaching £9,200 has an £800 absolute drawdown, although some platforms define the term differently.

Balance drawdown vs equity drawdown

Balance and equity can tell different stories, especially when leveraged positions remain open.

A stable balance can conceal falling equity from open losses. Ignoring equity may therefore understate current CFD and margin risk.

Drawdown duration and frequency

Duration is the time below a previous peak; frequency is how often material declines occur. Two strategies with 15% MDD may recover in days or remain underwater for months.

Average drawdown summarises typical declines but should not replace MDD, duration or individual-episode review.

Why Drawdown Matters to Traders

Drawdown matters because returns do not reveal the full risk taken along the way. It shows how much capital declined, how difficult recovery became and whether the experience was realistic for the trader following the strategy.

Deep declines reduce the capital base, so the gain needed to break even rises faster than the drawdown. Drawdown also reveals when a high return required a severe or prolonged decline.

There is also a behavioural cost. A long losing period can encourage panic exits, revenge trading or an impulsive change of strategy. For leveraged accounts, falling equity may also reduce free margin and restrict the ability to keep positions open or follow the original plan.

Same return, different drawdown

Consider two hypothetical strategies with the same annual result:

Strategy B reached the same return through a deeper fall and longer recovery. Neither entry establishes suitability; return, drawdown and time underwater must be considered together.

Limits of drawdown as a risk metric

The maximum drawdown is backward-looking and does not predict or cap the next decline. It changes with the selected dates, data frequency and use of closing balance or intraday equity.

Assess drawdown beside return, volatility, costs, duration, trade count and market conditions. A short, single-regime backtest may produce an unrepresentatively low MDD.

What Causes Drawdowns in Trading?

Drawdowns can arise during the normal losing phase of a viable strategy or signal a deeper problem. A few losses do not prove that an approach has stopped working, but an unusually deep, fast or unexplained decline deserves structured review.

Common causes include:

• Trade and portfolio exposure: oversized positions, concentrated holdings, correlated trades or excessive total exposure can turn one market move into several simultaneous losses.
• Leverage: large notional exposure relative to account equity makes a modest adverse move more significant at account level.
• Market conditions: volatility spikes, economic announcements, price gaps and changing market regimes can move prices beyond normal expectations.
• Liquidity and execution: wider spreads, slippage and limited liquidity can produce an exit away from the intended price.
• Costs: spreads, commissions, currency conversion and overnight financing can gradually reduce equity.
• Process and behaviour: moving stops, inconsistent entries, unplanned averaging down, overtrading and revenge trading can deepen a manageable decline.

Before changing a strategy, ask five questions:

• Is the drawdown within the range seen in sufficiently broad testing?
• Did position size, leverage or total exposure change?
• Are several positions driven by the same underlying risk?
• Did volatility, liquidity, spreads or financing costs change?
• Were the trading plan and exit rules actually followed?

The answers help separate market variation from sizing, execution or discipline problems. They cannot guarantee that the next decision will be profitable.

How Leverage and Margin Affect Drawdown in CFD Trading

Leverage can deepen account drawdown by allowing exposure greater than the cash committed as margin. A contract for difference tracks an underlying market’s price without conveying ownership.

Margin is required to open and maintain the position, but profit and loss come from full exposure. Leverage does not enlarge a market move; it enlarges the position relative to equity.

Worked CFD exposure example

Suppose an account has $10,000 of equity. Position A has $10,000 of market exposure, while Position B has $50,000. If the underlying market moves 4% against each position, the simplified results are:

This example is hypothetical and assumes no other account activity. It excludes the spread, commissions, overnight financing, slippage and currency conversion. Those items can affect the actual result.

Equity, free margin, and close-out risk

Open CFD losses reduce equity and free margin. A margin call signals insufficient equity under the provider’s rules; a stop-out or margin close-out automatically closes positions at the applicable threshold.

Thresholds and terminology vary by legal entity, account and product, so check the applicable leverage and margin terms. The risk applies to long positions when prices fall and short positions when prices rise.

Volatility, market gaps and low liquidity can accelerate a drawdown. A stop-loss may help manage exposure, but it can execute away from the requested level when the next available price is different.

Risk note: CFD trading is leveraged and high risk. Losses can occur quickly, and margin controls, stop-losses or other risk tools cannot guarantee a specific outcome.

How to Monitor, Manage and Recover From Drawdown

Define the measurement and response before losses occur. Separate preparation, live monitoring and review.

Before a drawdown

Choose balance or equity, intraday or closing values, and a review period. Set review points around your capital, strategy, leverage and capacity for loss rather than a universal “safe” percentage.

Base position size on planned monetary loss and stop distance, not maximum available margin. Also review correlation: EUR/USD, gold and an index may share sensitivity to the US dollar or interest rates.

Backtesting and stress testing can show how an approach behaved in varied conditions. Historical maximum drawdown remains an observation, however, not a ceiling on future losses.

During a drawdown

Monitor the high-water mark, current and maximum drawdown, duration, equity and free margin. At pre-defined points, verify execution, correlated exposure and any change in market conditions or strategy assumptions.

Any reduction in exposure or pause should follow the trading plan. Increasing position size simply to recover more quickly raises risk when capital and confidence may already be under pressure. Fixed and trailing stop-loss orders can support a plan, but gaps and slippage mean they do not guarantee the exact exit price.

After or while recovering

Use a trading journal to separate strategy performance from sizing, execution, costs and emotion. Compare depth, duration and frequency with earlier tested episodes.

Material changes should be tested before they are applied to live trading. Resume or adjust exposure according to predefined rules, not from a desire to win back losses.

How to Trade CFDs: Step by Step

For UAE traders, moving from education to practical CFD trading begins with choosing an appropriate provider, understanding the underlying market and testing a written plan before committing capital.

• Choose an appropriately regulated broker. Confirm the legal entity that would hold your account and whether it is authorised to serve you. The UAE’s regulatory structure includes the federal Capital Market Authority, the DFSA in the DIFC and the FSRA in the ADGM. A licence in one jurisdiction does not automatically provide blanket authorisation everywhere.
• Open and verify your account. Complete the registration and KYC process using accurate information. You will normally need proof of identity and proof of residential address, while additional suitability or risk-assessment questions may apply.
• Start with a demo account. Use the demo environment to learn order mechanics and test whether the trading plan can be followed without risking real funds. Simulated execution may not reproduce every live-market condition.
• Build a routine using Gulf Standard Time. GST is UTC+4 throughout the year, but CFDs do not share one universal schedule. Share CFDs follow the relevant exchange, while forex, index, commodity and cryptocurrency-related products have different hours and trading breaks. Check the exact instrument specification.
• Identify the relevant catalysts. Share CFDs can react to earnings and company news; index and forex CFDs to economic data and interest-rate expectations; commodity CFDs to supply, inventories and geopolitics; and cryptocurrency-related products to liquidity and regulatory developments.
• Plan the trade before placing it. Define the direction, entry condition, invalidation level, stop-loss and possible target. Record what would cause you to cancel the idea.
• Calculate the position from the stop-loss. Determine the maximum cash exposure permitted by your personal plan, then calculate size from the stop distance and contract value. Do not assume one percentage is suitable for every trader.
• Execute, manage and review. Place the order only when all conditions are satisfied. Monitor exposure and margin, follow the exit rules and document the trade afterwards.

Careful research and risk management remain necessary because CFDs are leveraged products and losses can occur even when a trade follows the written plan.

How to Open a CFD Trading Account on Markets.com: A Step-by-Step Guide

Opening a CFD account on Markets.com takes just a few minutes, whether on the website or mobile app. Follow these five steps to go from sign-up to your first trade.

Step 1: Sign Up for an Account

Visit Markets.com or download the app, click "Create Account," and register with your email or a Google/Facebook/Apple account.

Step 2: Verify Your Identity (KYC)

Complete the KYC check by entering your personal details and uploading proof of identity and address.

Step 3: Fund Your Account

Deposit via card, bank transfer, e-wallet, Apple Pay, or Google Pay. The minimum deposit is $100.

Step 4: Choose a Market and Place Your Trade

Select an asset like gold, forex, or shares. Choose Buy if you expect the price to rise, Sell if you expect it to fall, and set a stop-loss and take-profit before confirming.

Step 5: Manage and Close Your Positions

Monitor open trades, adjust risk settings as needed, and close positions manually or automatically when targets are hit.

New to Markets.com? Claim a generous deposit bonus on your first trade. Hurry—this offer is only available for a limited time.

Conclusion

Understanding what is drawdown in trading gives you a clearer view of risk than returns alone. Drawdown measures the decline from a prior peak to a later trough, while maximum drawdown identifies the deepest observed fall over a chosen period. Its depth, duration and recovery requirement help show whether a strategy’s loss path is tolerable. In CFD trading, position size, leverage, margin, volatility and liquidity can make account drawdowns more severe. Consistent equity monitoring, predefined risk limits and post-trade review cannot remove losses, but they can support more disciplined decisions, including when using Markets.com’s demo or live trading environment.

FAQs

What is drawdown in trading in simple terms?

Drawdown is the decline in an account, portfolio or strategy from a previous peak to a later low. It shows how far value fell before recovering and may be expressed as money, a percentage or a period of time.

How do you calculate drawdown percentage?

Subtract the trough value from the earlier peak, divide the result by the peak, and multiply by 100. If equity falls from $12,500 to $10,000, the drawdown is ($12,500 − $10,000) ÷ $12,500 × 100 = 20%.

What is maximum drawdown?

Maximum drawdown is the largest peak-to-trough decline recorded during a chosen period. It can help compare the downside history of accounts or strategies, but it is backward-looking and does not predict the worst loss that may occur later.

What is a good drawdown in trading?

There is no universal “good” drawdown percentage. A tolerable level depends on the trader’s objectives, time horizon, strategy, leverage, capital and capacity for loss. Compare drawdown with returns, duration and market conditions rather than relying on one benchmark.

Is drawdown the same as a loss?

Not exactly. A loss usually describes a negative result on one trade or a reduction from starting capital. Drawdown measures a cumulative decline from a prior high, so an account can remain profitable overall while still being in drawdown.

How does leverage affect drawdown in CFD trading?

In CFD trading, leverage permits market exposure greater than the margin used to open a position. Because profit and loss are based on the full position size, an adverse price move can produce a larger percentage decline in account equity and increase margin pressure.