Max drawdown explained for traders
Founder of TradeStack. Builds the importer and reviews every broker export format by hand.
Max drawdown is the largest peak-to-trough decline in your equity curve, expressed as a percentage. A 50% drawdown needs a 100% gain to recover, which is why controlling drawdown matters more than chasing returns.
The formula
Max Drawdown = (Peak Equity - Trough Equity) / Peak Equity. Track it on your realized equity curve, from every new high to the lowest point before the next new high.
Max DD % = (Peak - Trough) / Peak x 100
The recovery math
A 10% drawdown needs 11.1% to recover. 20% needs 25%. 33% needs 50%. 50% needs 100%. Losses compound against you faster than gains compound for you, which is the whole argument for position sizing.
Why prop firms care
Nearly every funded account fails on a drawdown rule, not a profit target. Knowing your historical max drawdown from your journal tells you whether a 5% daily or 10% overall limit is realistic for your style.
How to reduce it
Cap daily loss, cut position size after two consecutive losers, and stop trading the setups with negative expectancy. Your journal identifies those setups; discipline does the rest.
Frequently asked
What is an acceptable max drawdown?
Most discretionary day traders aim to keep max drawdown under 20% of account equity.
Is drawdown measured on closed or open trades?
Both are used. Journals typically measure realized (closed-trade) drawdown; prop firms often measure intraday equity including open positions.
Does TradeStack show drawdown?
Yes. The equity curve and daily P&L calendar make peak-to-trough declines visible at a glance.
Sources
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