What Is Max Drawdown in Trading?
Maximum drawdown is the largest percentage decline an account experiences from an equity peak down to the lowest point that follows, before a new peak is made. It captures the worst stretch a trader actually lived through — not an average, but the single deepest hole the account fell into.
Formula
Max Drawdown (%) = (Peak Equity − Trough Equity) ÷ Peak Equity × 100Worked example
An account grows to a peak of ₹10,00,000, then falls over several weeks to ₹7,60,000 before recovering and making a new high. Max drawdown = (10,00,000 − 7,60,000) ÷ 10,00,000 × 100 = 24%.
Recovery math is asymmetric: getting back from a 24% drawdown to break-even requires roughly a 31.6% gain on the reduced capital, not 24%. That gap widens sharply as drawdown deepens — a 50% drawdown needs a 100% gain just to recover, which is why protecting the downside matters more than chasing the upside.
What's a good number?
There is no universal "good" drawdown — it depends on account size, leverage, and strategy style. As a rough guide, under 10-15% is conservative and typical of lower-leverage, longer-horizon strategies. 15-25% is common for more aggressive intraday or options strategies. Above 35-40% is a red flag regardless of the returns generated, since most traders hit a psychological breaking point long before the math forces them out.
The more useful benchmark is your own history: define the worst drawdown you can tolerate in advance, and treat approaching that level as a trigger to cut size, not a surprise to react to after the fact.
Common mistakes traders make with max drawdown
- Sizing up right after a winning streak, which is exactly when the next drawdown tends to arrive and does the most damage.
- Not defining a maximum tolerable drawdown in advance, so decisions about cutting size get made emotionally, in the middle of the drawdown itself.
- Measuring drawdown only in rupees instead of percentage terms, which becomes misleading as the account grows or shrinks over time.
- Confusing "average drawdown" or a single bad day with maximum drawdown — max drawdown specifically measures the single deepest peak-to-trough decline in the entire history.
TradeMind tracks live drawdown and recovery factor as you trade, with guardrails that flag when you are approaching your defined risk limits through Guardian mode.