What is Drawdown?
Quick answer
A drawdown is the drop from a peak in an account or strategy value to a later low, measured as a percentage. Maximum drawdown is the largest such drop over a period. It matters because it shows the worst decline you would have had to sit through, and recovering from a large drawdown takes a disproportionately bigger gain: a 50% drawdown needs a 100% gain to get back to even.
Drawdown is one of the most important risk numbers in trading, and it is often more revealing than the headline return. It tells you how deep the losses got along the way, not just where the balance ended up.
How drawdown is measured
A drawdown is measured from a peak to a subsequent trough, as a percentage of the peak. If an account rises to $10,000 and then falls to $8,000, that is a 20% drawdown. Maximum drawdown is the largest peak-to-trough drop over the period you are looking at. Recovering is not symmetric: because the gain is calculated on the smaller balance left after the loss, a 20% drawdown needs a 25% gain to recover, and a 50% drawdown needs a 100% gain.
Why drawdown matters in copy trading
When you copy a trader, you inherit their drawdowns, not just their best months. A strategy can have a high win rate and still put you through a deep decline that is hard to sit through and slow to recover from. Looking at drawdown alongside win rate and risk and reward gives a fuller picture of the real risk of a strategy before you follow it. You can also use daily-loss caps and exposure limits to bound how far a bad run goes.
Frequently asked questions
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