Maximum drawdown
Maximum drawdown is the largest peak-to-trough decline in an account's value, expressed as a percentage of the peak — a measure of the worst loss experienced from a high-water mark.
If an account rises to $10,000 and then falls to $8,500 before recovering, the maximum drawdown is 15%. It measures the deepest hole, not the final result, which is why two accounts finishing the year identically can represent completely different experiences.
Why recovery is asymmetric
Losses and the gains needed to undo them are not symmetric, and the asymmetry accelerates. A 10% loss needs 11.1% to recover. A 25% loss needs 33.3%. A 50% loss needs 100%. An 80% loss needs 400%. This is arithmetic, not opinion — you can verify each figure directly.
This asymmetry is the entire argument for controlling drawdown rather than chasing returns. Avoiding the deep hole is mathematically cheaper than climbing out of it.
Prop firms use drawdown as their primary risk control precisely because of this. A trailing drawdown, which follows the account's high-water mark upward, is stricter than a static one measured from the starting balance — the distinction matters and is often missed until it is breached.
Related terms
Maintained by Jared Sinclair, Founder · Syrax Global FZCO · Definitions are educational, not financial advice.
Knowing the vocabulary is the easy part.
Every term here can be learned in an afternoon. Applying them consistently under pressure is the part that decides outcomes — and the part we measure.