# Drawdown Explained - Maximum, Relative, and Absolute > Drawdown is the most important risk metric in trading. Here is what each type of drawdown means, how to measure it, and what levels are acceptable. **Tags:** drawdown, risk-management, money-management, account-protection **URL:** https://traderjournal.app/money-management/drawdown-explained-maximum-relative-absolute --- # Drawdown Explained - Maximum, Relative, and Absolute Drawdown measures how far your account has fallen from its peak value. It is the most important risk metric in trading because it tells you how bad things got at the worst point - even if the account eventually recovered. There are three types of drawdown that traders commonly discuss, and each tells you something different. --- ## Absolute Drawdown Absolute drawdown measures the largest drop in equity below your initial deposit. If you start with $10,000 and your account falls to $8,500 at its lowest point before recovering, your absolute drawdown is $1,500 (or 15%). Absolute drawdown is used as a risk metric by prop firms and investors. It answers the question: how far did you fall from where you started? --- ## Maximum Drawdown (Peak-to-Trough) Maximum drawdown measures the largest drop from any equity peak to the subsequent trough, before the account recovers to a new peak. This is more meaningful than absolute drawdown for ongoing risk assessment. A trader who starts at $10,000, grows to $15,000, then falls to $12,000 has an absolute drawdown of $0 (still above starting balance) but a maximum drawdown of $3,000 (20% from the $15,000 peak). Maximum drawdown is what appears in Trader Journal's Reports tab. It shows you the worst equity correction you experienced during the measurement period. --- ## Relative Drawdown Relative drawdown expresses maximum drawdown as a percentage of the peak equity, rather than the dollar amount. Using the example above: Peak equity: $15,000 Trough equity: $12,000 Relative drawdown: ($15,000 - $12,000) / $15,000 = 20% Relative drawdown is the most commonly cited metric because it scales across different account sizes. A 20% drawdown is a 20% drawdown whether the account is $5,000 or $500,000. --- ## What Drawdown Levels Are Acceptable General benchmarks for evaluating drawdown: **Under 10%** - Low drawdown. Consistent with conservative risk management and a relatively smooth equity curve. **10-20%** - Moderate drawdown. Acceptable for many retail traders, requires meaningful account recovery but is psychologically manageable. **20-30%** - High drawdown. A 25% drawdown requires a 33% gain just to return to the peak. Many traders at this level consider reducing position sizes. **Above 30%** - Severe drawdown. A 30% drawdown requires a 43% recovery. A 50% drawdown requires a 100% gain to recover. These levels are extremely difficult to recover from psychologically and statistically. **Prop firm limits** typically sit at 5-10% maximum drawdown. This is significantly tighter than retail trader norms. --- ## Drawdown Duration Dollar or percentage drawdown is only half the picture. Duration matters too. A 15% drawdown that lasts 2 weeks is a very different experience from a 15% drawdown that persists for 3 months. The longer a drawdown persists, the more psychological pressure it creates and the more likely a trader is to make changes that are not data-supported. Your equity curve in Trader Journal shows you both the depth and the duration of your drawdowns visually. A curve that dips and recovers quickly looks very different from one that slowly grinds lower over months. --- ## The Recovery Math Understanding recovery math changes how traders think about drawdown limits. | Drawdown | Recovery required to break even | |---|---| | 10% | 11.1% | | 20% | 25.0% | | 30% | 42.9% | | 40% | 66.7% | | 50% | 100.0% | | 60% | 150.0% | A 50% drawdown requires 100% gain to break even. This asymmetry is why capping maximum drawdown through position sizing and daily loss limits matters so much. --- Trader Journal tracks maximum drawdown in both dollars and percentage in the Reports tab. Download at android.traderjournal.app or ios.traderjournal.app.