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Risk Trading Glossary

Drawdown

Drawdown is the decline from an account high to a lower balance or equity level. It measures how much capital has been lost from a previous peak.

Quick definition

Drawdown is the fall from a previous account or strategy peak to a later low. It can be measured in money or percentage terms and can refer to closed balance, live equity, or a backtested equity curve depending on context.

Why it matters

Why drawdown matters to traders

Drawdown shows the path taken to achieve returns, not just the final result. Deep drawdowns require disproportionately larger percentage gains to recover and can expose weaknesses in risk, strategy fit, or trader behaviour.

Practical use

How traders use it

Traders monitor current and maximum drawdown, compare them with tested expectations, and reduce risk when conditions or behaviour move outside the normal range. Funded accounts also impose specific drawdown rules that must be understood separately.

Common mistake

What to avoid

The mistake is treating drawdown as a temporary inconvenience while continuing to size as if nothing changed. A deteriorating equity curve deserves diagnosis, not automatic attempts to win the money back quickly.

Use the concept, not the label

Trading terminology is useful only when it improves a repeatable process. Define the concept clearly, test how you use it, pair it with risk management, and avoid turning chart language into certainty about what the market must do next.