Risk Management
Drawdown
The decline from a peak to a trough in account balance.
Full Definition
Drawdown measures the largest percentage drop in your trading account from a peak to a subsequent low point before a new peak is achieved. It's a critical risk metric that shows the potential loss exposure of a trading strategy. Maximum drawdown tells you the worst-case scenario you've experienced. Professional traders and prop firms closely monitor drawdown limits.
Example
If your account grows from $10,000 to $15,000, then drops to $12,000, your drawdown is $3,000 or 20% (from $15,000 peak to $12,000 low). This is crucial for prop firm traders who often have 5-10% daily drawdown limits.
Formula
Drawdown % = (Peak Value - Trough Value) ÷ Peak Value × 100Related Terms
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