What is Drawdown?
Drawdown: Drawdown is the peak-to-trough decline in a trading account's value, expressed as a percentage. It measures how much an account has fallen from its highest point.
Full Definition
Drawdown measures the decline from a peak equity value to a subsequent trough before a new peak is reached. If your account reaches ₹1,00,000 and then falls to ₹80,000, your drawdown is 20%. Maximum drawdown (max DD) is the largest single drawdown experienced over a period. Understanding drawdown is critical for evaluating a trading strategy's risk profile and psychological sustainability.
Impact on Your Trading
A 20% drawdown requires a 25% gain to recover. A 50% drawdown requires a 100% gain. This asymmetry means protecting capital during drawdowns is mathematically more important than chasing returns. Most professional trading strategies aim for a max drawdown below 15–20%.
For Indian Traders
Drawdown tracking is essential for Indian F&O traders because options premium decay and gap-up/gap-down openings can cause rapid account value changes. Monitoring drawdown helps traders know when to scale back and reassess their strategy.
How to track this in your journal
Plot your equity curve in your journal and track your current drawdown from peak. When drawdown exceeds 10%, consider reducing position size by 50% until you return to breakeven.
Frequently Asked Questions
What is a normal drawdown for a trader?▼
For retail traders, drawdowns of 5–15% are common and manageable. A drawdown exceeding 20% is a serious warning sign to review and adjust your strategy. Professional fund managers typically have strict drawdown limits of 10–15% — breaching them triggers mandatory reduction in position size.
Track Drawdown in your journal
Use Trade Prom to monitor how drawdown affects your trading results.
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