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What is Drawdown?

The percentage decline from a peak equity value to a subsequent trough — measures how much your account has lost from its highest point.

Drawdown is the most important risk metric for traders and prop firm challengers. It measures how far your account has fallen from its peak before recovering.

Types of drawdown:

TypeDefinition
Absolute drawdownLoss from starting balance
Relative drawdownLoss from highest balance reached
Daily drawdownMax loss in a single trading day

Example: Your account peaks at $110,000 then falls to $99,000.

Drawdown = (110,000 − 99,000) / 110,000 = **10%**

Why it matters for prop firms:

Most prop firms (FTMO, MyFundedFX, Topstep) enforce hard drawdown limits:

  • FTMO: 10% max overall, 5% daily
  • MyFundedFX: 10% max overall, 5% daily
  • Breach either limit and you fail the challenge — no exceptions.

    Managing drawdown:

  • Size positions so a losing streak of 5–10 trades stays within 3–5% drawdown
  • Use a daily loss limit equal to your best expected daily gain
  • Stop trading when you hit 50–70% of your drawdown limit
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