Drawdown is the distance between the highest value your account has reached and where it is now. Maximum drawdown is the deepest such fall over a period. It is the number that tells you how painful a strategy is to hold, and for prop-firm traders it is the number that ends an account.

Formula

peak(k) = highest equity up to trade k
drawdown(k) = (peak(k) − equity(k)) / peak(k)
max drawdown = the largest drawdown(k) over the period

Equity here is the starting balance plus the net result of every closed trade, in order.

Example

An account starts at $10,000, climbs to $12,000, falls to $10,800, then makes a new high at $12,400.

Point Equity Peak Drawdown
Start $10,000 $10,000 0
High $12,000 $12,000 0
Low $10,800 $12,000 $1,200 (10.0%)
New high $12,400 $12,400 0

The maximum drawdown is $1,200, or 10%, even though the account never went below its starting balance.

Recovery is asymmetric

Getting back from a drawdown takes a larger gain than the loss:

Drawdown Gain needed to recover
10% 11.1%
20% 25.0%
30% 42.9%
50% 100%

This is why risk per trade matters more than any entry technique.

In SetupBook

Max drawdown is a dashboard card, the drawdown chart in Analytics marks the deepest point and how many trades it took to recover, and the trader score gives full marks at 0% and none at 20% or more. Drawdown is always measured from the account's start, even when you look at a shorter period, so a filter can never hide an older peak. Analytics also shows the recovery factor: net P&L divided by the maximum drawdown in money.

For prop accounts, see trailing drawdown and daily loss limit: the firm's rule may measure from a different point than this chart.