Drawdown in trading is the fall in an account's value from its highest point to a later low, before it makes a new high. It is usually given as a percentage of that peak: an account that climbs to $10,600 and then drops to $9,950 is in a 6.1% drawdown, although it is only 0.5% below where it started.
In short
- Drawdown = (peak minus trough) ÷ peak. A fall from $10,600 to $9,950 is $650, or 6.1%.
- Maximum drawdown is the largest peak-to-trough fall over a period. It is the usual way to compare how rough two strategies or accounts have been.
- Losses need larger gains to recover: a 20% drawdown needs a 25% gain to get back to the peak, and a 50% drawdown needs 100%.
- Prop firms cap drawdown in two ways: a daily limit on one day's losses, and a maximum loss for the whole account, which is either fixed or trailing (rising with each new high).
- On CMC Funded the daily loss limit is a share of each day's starting equity, measured on equity, $500 on the first day of a $10,000 Classic account, and the maximum loss is a fixed floor that never moves, $9,000 on the same account.
What is drawdown in trading?
Drawdown means how far your account has fallen from its last high. It is measured from the peak, whatever your starting balance was, and it lasts until the account makes a new high. A losing trade is one event. A drawdown can run across many trades and several weeks, and it includes the winners in between.
The drawdown meaning differs outside trading. In pensions and loans, "drawdown" means taking money from a fund or a credit line, which has nothing to do with trading losses.
Two pairs of terms come up often.
Balance drawdown counts closed trades only. Equity drawdown also counts the floating result of open positions, so it is usually the larger figure. If your balance is $10,200 and an open trade is $300 down, your equity is $9,900, and an equity-based limit sees $9,900.
Absolute drawdown measures how far the account has fallen below its starting balance. Relative drawdown measures the fall from the highest peak, as a percentage. In the opening example, the absolute drawdown is $50 (0.5%) and the relative drawdown is $650 (6.1%). Traders usually mean the second kind. A fixed maximum loss, like the floors later in this guide, works more like the first, because it is set from the starting balance.
How do you calculate drawdown and maximum drawdown?
To calculate drawdown, take the highest value the account reached, subtract the deepest low that followed it, and divide by the peak: (peak minus trough) ÷ peak × 100. Maximum drawdown is the largest of these falls over the whole record, so you track the running peak and keep the deepest drop below it.
Take an account that closes each day at these values: $10,000, $10,300, $10,600, $10,180, $9,950, $10,300, $10,900, $10,500.
- The first peak is $10,600. The deepest low after it, before a new high, is $9,950. The drawdown is $650 ÷ $10,600 = 6.1%.
- The account then makes a new high at $10,900, which ends that drawdown and starts the count again.
- It falls to $10,500, a drawdown of $400 ÷ $10,900 = 3.7%.
- The max drawdown for the period is the larger of the two: 6.1%.
Our drawdown calculator does this sum for any peak and trough.
It also helps to express drawdown in units of risk. At 1% risk on $10,000, one full loss is $100, so the $650 drawdown equals six and a half losing trades. If you size each trade at 1% of the current balance instead of the starting balance, ten straight losses cost 9.6% rather than 10%, because each loss is taken from a smaller balance.
Why does a bigger drawdown need a much bigger gain to recover?
A bigger drawdown needs a bigger gain because the recovery is earned on a smaller balance. Lose 20% of $10,000 and you have $8,000. Getting back to $10,000 means making $2,000 on $8,000, which is 25%. The formula is: gain needed = loss ÷ (1 minus loss).
| Drawdown | Gain needed to get back to the peak |
|---|---|
| 4% | 4.2% |
| 5% | 5.3% |
| 6% | 6.4% |
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
Small drawdowns recover almost point for point: a 5% fall needs 5.3%. Past about 20%, the gap widens fast, and a 50% fall needs the account to double.
In the example above, getting from the $9,950 trough back to the $10,600 peak takes $650, a 6.5% gain on $9,950. Reaching a Classic Phase 1 target of $10,800 from the same trough would take $850, or 8.5%, against the 8% the account needed on day one.
How much drawdown is acceptable?
No single figure is acceptable for everyone. The drawdown you can accept depends on two things: the hard limit you trade under, and the losing streaks your strategy will produce. Size your risk so that a normal bad run uses only part of the limit, with room left for a worse one.
Losing streaks are common, even for a strategy with an edge. For a strategy that wins 40% of trades, the odds of at least one run of six straight losses somewhere in 100 trades are about 87%. A run of ten has about a 20% chance.
At 1% risk per trade, six straight losses is a 6% drawdown. That is the entire maximum loss on a Direct account. At 0.5% risk, the same run is 3%, and ten in a row is 5%. Our risk to reward ratio guide shows how win rate and target size change those streaks.
On your own account the same maths applies, without a firm's limit to stop you. Write down the drawdown at which you will stop trading and review the strategy, before you are in one.
Daily drawdown vs maximum drawdown: what is the difference?
Daily drawdown limits how much you can lose in a single day. Maximum drawdown limits how far the account can fall in total. They are separate rules, and you can break either one without touching the other: a single bad day can break the daily limit, and a run of moderate losing days can break the maximum.
Take a $10,000 Classic account on CMC Funded, with a $500 daily loss limit and a $9,000 floor. Lose $400 on each of three days and you never reach the daily limit. After two days the account is at $9,200, and on day three the first $200 of losses takes it to the $9,000 floor. The account ends with $300 of that day's limit unused.
Firms set these rules in different ways, so read the full wording as well as the headline percentage:
- Size. Some daily limits are a fixed dollar amount, and some are a percentage of each day's opening balance, which grows or shrinks with the account.
- Open positions. An equity-based limit counts losing open trades as they move. A balance-based limit counts only closed trades.
- Starting point. Firms differ on whether a day's loss is counted from that day's opening balance, its opening equity or another figure.
Static vs trailing drawdown: how does a trailing drawdown work?
A static (fixed) drawdown sets the floor once, a set distance below the starting balance, and leaves it there. A trailing drawdown sets the floor a set distance below the highest value the account has reached, so the floor rises with every new high and never falls back. Gains give you more room under a static floor. Under a trailing one, the room never grows past the original allowance.
Trailing drawdowns come in three common versions:
- End-of-day trailing follows the highest closing balance. A good morning that fades by the close does not move the floor.
- Intraday trailing follows the highest equity at any moment, open trades included. Start at a new high, let a trade run to $500 up and close it $100 up: the floor has risen $500 while the account gained $100, so you have used $400 of room on a winning trade.
- A trail that stops once the floor reaches the starting balance. After that, it behaves like a static floor.
A trailing floor follows the single highest point, not the sum of good days. If the account peaks at $10,750, a $1,000 trailing floor sits at $9,750, however many separate highs it took to get there.
Static is the easier rule to trade once you are ahead, because every dollar of gain is extra room. Trailing rewards traders who bank gains and give little back.
How do drawdown rules treat the same losing streak?
The same equity curve can leave plenty of room under one rule and end the account under another. Below, one $10,000 account runs through five days, and the result is checked against four rule sets: the two CMC Funded routes and two trailing rules used here as examples. For simplicity, assume no day dipped below its closing figure.
- Day 1 closes +$300 at $10,300.
- Day 2 closes +$300 at $10,600. During the day an open trade took equity to $10,750 before it was closed.
- Day 3 closes -$420 at $10,180, a 4.0% drawdown from the $10,600 peak.
- Day 4 closes -$230 at $9,950. The drawdown is now $650, or 6.1%.
- Day 5 closes +$350 at $10,300, still 2.8% below the peak.
| Rule | Floor at the low on day 4 | Room left at $9,950 | Result |
|---|---|---|---|
| Classic $10K: 5% daily limit, fixed $9,000 floor | $9,000 | $950 | Still trading |
| Direct $10K: 4% daily limit, fixed $9,400 floor | $9,400 | $550 | Still trading, but day 3's $420 loss came within $4 of that day's $424 limit |
| Example: 10% end-of-day trailing ($1,000 below the highest close) | $9,600 | $350 | Still trading |
| Example: 10% intraday trailing ($1,000 below the highest equity) | $9,750 | $200 | Still trading, with two losing trades of room at 1% risk |
The Classic account has almost three times the room of the end-of-day trailing account at the same low, because its floor never rose. The Direct account survives only just: its limit on day 3 was 4% of the $10,600 it started the day with, or $424, and the day lost $420. By day 5 the account is $300 up overall, yet the intraday trailing version has only $550 of room ($10,300 minus $9,750) against $1,300 under the fixed Classic floor.
How drawdown limits work on CMC Funded
CMC Funded uses two limits. The daily loss limit is 5% (Classic) or 4% (Direct) of your equity at the start of each day, so it moves with your account, and it is measured on equity. The maximum loss is 10% on Classic and 6% on Direct, a fixed floor that never moves, however far the account rises.
In dollars, the daily loss limit on the first day and the floor are:
- $10,000: Classic $500 and $9,000. Direct $400 and $9,400.
- $25,000: Classic $1,250 and $22,500. Direct $1,000 and $23,500.
- $50,000: Classic $2,500 and $45,000. Direct $2,000 and $47,000.
- $100,000: Classic $5,000 and $90,000. Direct $4,000 and $94,000.
The daily limit is worked out afresh each day from that day's starting equity, so it is larger after a good day and smaller after a losing one. Open positions count against it, an unused allowance does not carry over, and reaching it ends the account with no warning stage.
The floor is fixed in dollars and the daily limit moves with your equity, so the room each one leaves changes as the account moves:
- After a good run, the daily limit grows with the account. A Classic day that starts at $10,800 has a $540 limit, still 5%.
- Close to the floor, the floor binds first. At $9,300 on a $10,000 Classic account, you are $300 from the $9,000 floor, so a $300 day ends the account well short of that day's $465 daily limit.
- Gains move you away from the floor. At $10,800, the Classic floor is $1,800 below you, against $1,000 on day one.
There is no time limit, so you can take as long as you need to recover from a drawdown. The daily loss and maximum loss lesson works through both limits trade by trade.
Common mistakes
- Measuring drawdown from the starting balance. A fall from $10,600 to $9,950 is a 6.1% drawdown, even though the account is only 0.5% below where it began.
- Forgetting open positions. An equity-based limit counts a losing open trade before you close it, so add floating losses to the day's closed losses.
- Treating a fixed daily limit as a percentage of today's balance. On CMC Funded, $500 stays $500 on a $10,000 Classic account whether the account is at $9,500 or $10,800.
- Raising size to win a drawdown back faster. Larger trades make the next losing streak deeper, and every extra percent of drawdown needs more than a percent to recover.
- Sizing so that a normal losing streak equals the maximum loss. Six straight losses at 1% is the whole 6% on Direct, and that run is likely in 100 trades at a 40% win rate.
- On a trailing account elsewhere, letting an open winner give most of its gain back. The floor has already moved up to meet the peak.
Questions traders ask
Is a 20% drawdown bad?
It depends on the account. On a $10,000 Classic account the $9,000 floor ends the account first, unless it has already climbed to $11,250, the point from which a fall to the floor measures 20%. On your own account, a 20% drawdown needs a 25% gain to recover, so weigh it against what the strategy makes.
What is intraday drawdown?
Intraday drawdown is the largest fall in equity during a trading day, including open positions at their worst moment. A day that closes $100 down may have been $450 down at its low. Equity-based daily limits watch that intraday figure, so the low point matters more than the close.
Does a trailing drawdown reset every day?
No. A trailing floor only moves up, as the account sets new highs, and it never moves back down after a loss. What restarts each day at many firms is the daily loss limit, which is a separate rule. On CMC Funded the maximum loss floor stays where it started, and the daily loss limit is worked out afresh each day as a share of that day's starting equity.
How do you reduce drawdown?
Risk less per trade, since drawdown grows with the size of each loss. Set a personal daily stop below the firm's limit, such as three losses. Avoid holding several positions that move together, like two USD pairs in the same direction, which act as one larger trade. Then check your worst runs in your trading log.
Next steps
Work through the daily loss and maximum loss lesson with your own numbers, then put your peak and trough into the drawdown calculator. The position size calculator turns a risk percentage into a lot size, and the full Classic and Direct limits are on the rules page.
You can compare both routes and every account size on the challenges page.