Drawdown

Whenever traders ask what drawdown is in forex, the clearest answer is: it measures how far an account falls from a high-water mark before recovering. Drawdown is computed from the equity curve, not the balance, so it includes the unrealized loss of open trades. The formula is Drawdown % = (Peak Equity − Trough Equity) ÷ Peak Equity × 100, measured between the highest point reached and the lowest point that follows it.

There are two related figures. Relative (or current) drawdown is the distance from the most recent peak to right now. Maximum drawdown (MDD) is the deepest peak-to-trough fall over the whole track record — the worst the account ever felt. MDD is what disciplined evaluators look at first, because it sets realistic expectations for the pain a strategy can inflict and helps size positions before a stop loss is ever hit.

The reason low drawdown is prized is asymmetric recovery math. Losses and the gains needed to undo them are not symmetric: a 10% drawdown needs an 11.1% gain to recover, a 25% drawdown needs 33.3%, a 50% drawdown needs a full 100% gain, and an 80% drawdown demands a 400% return just to break even. This convex relationship is why a strategy with a 20% maximum drawdown is far safer than one with 60%, even if the second posts bigger headline returns.

Worked example: an account peaks at $12,000, then a losing streak drives equity down to $9,000 before a new high. The drawdown is ($12,000 − $9,000) ÷ $12,000 × 100 = 25%, and the account must then gain 33.3% from $9,000 to reclaim $12,000. When comparing Expert Advisors, always read maximum drawdown alongside return — a smooth equity curve with shallow drawdowns is usually more sustainable than a spiky one, because it survives the inevitable bad run without a forced stop out.