Drawdown: how to measure a drop in your capital

Drawdown measures how much the value of an account or portfolio has fallen from its last peak to its lowest point before the losses are recovered: drawdown = (peak − trough) / peak. Maximum drawdown is the largest such decline in the period studied and one of the basic measures of a strategy's risk.

Recovering from a drawdown gets harder and harder: after a 50% decline, you need a 100% gain to get back to the peak, because 0.5 × 2 = 1. That is why risk control on each single trade matters so much. Historical drawdown is not an upper limit on future losses, because the next drawdown can be deeper. Drawdown can also be calculated for the price of an asset alone.