DD: Drawdown
Also known as: equity drawdown, decline from peak
What is it?
Drawdown is the drop in your account's value from its highest point down to a lower point, before it climbs back to a new high. Imagine your account grows to $12,000 and then a run of losing trades pulls it down to $9,600. You are now in a drawdown, and it is usually written as a percentage: in this case a 20% drawdown, because the account is 20% below its peak. The drawdown only ends once the account recovers past that old $12,000 high.
Drawdown matters because it is what you actually experience and have to sit through emotionally, not just a number in a report. A strategy can show an attractive yearly return, but if it puts your account through painful dips along the way, you may give up before it recovers. It is important to understand what drawdown does and does not tell you. It shows the historical decline a strategy or account went through, but it does not promise that future drawdowns will be the same size or smaller.
Past behaviour is not a forecast, and live conditions can be worse than anything seen before. There is no such thing as a risk-free strategy, and all trading puts your capital at risk. Reading drawdown alongside returns gives you a far more honest picture than looking at profit alone.
Why it matters: Drawdown is what you actually live through; a strategy's headline return is meaningless if its drawdowns are larger than you can tolerate.
Drawdown % = (peak equity - trough equity) / peak equity x 100
Drawdown tolerance, not return, is usually what determines whether a trader sticks with a strategy.
Real-world example
An account that falls from $12,000 to $9,600 is in a 20% drawdown until it recovers above $12,000.
How SignalBots handles it
SignalBots' performance views show drawdown alongside returns so a feed's real risk is visible, not just its wins. See /risk-warning.
Pro tip
Size positions so the worst plausible drawdown stays within what you can hold without abandoning the strategy.
Common pitfalls
Focusing on annual return and ignoring drawdown, then quitting a sound strategy at its first deep dip.
Frequently asked questions
What counts as an acceptable drawdown?
There is no universal number. It must be a level you can hold through without panic-quitting the strategy. Lower-drawdown approaches are easier to stick with, but every strategy can lose money and your capital is always at risk.
Is drawdown the same as a loss?
Not exactly. A drawdown measures the decline from a peak and can recover if the account makes new highs. A realised loss is locked in when you close a trade. An open drawdown can shrink or deepen before it is over.
Does a small historical drawdown mean my account is safe?
No. A small past drawdown describes what has happened so far, not what will happen. Future market conditions can produce a deeper one, so never treat a low historical figure as a guarantee.
How do I reduce my drawdown?
The main lever is risking less per trade, so each loss and each losing streak does smaller damage. Smaller position sizes shrink potential drawdown, though they also reduce potential gains.
Why do you show drawdown next to returns?
Because return alone hides the risk taken to earn it. Showing the historical drawdown lets you judge whether you could have actually held the strategy through its worst stretches. Past results do not guarantee future ones.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.