What is Drawdown in Trading?

Drawdown measures the decline in the value of a trading account or investment from a previous peak to a subsequent low. It shows how much capital was lost during a period of decline before the account recovered or reached another high.

For more clarity, let’s study an example:

• Suppose a trading account increases from ₹5 lakh to ₹6 lakh and later falls to ₹5.4 lakh. 
• Now, the drawdown from the ₹6 lakh peak is ₹60,000, or 10%.

What is “Maximum Drawdown”?

Maximum drawdown is the largest “peak-to-trough” decline recorded during a specified period. For example:

• Suppose the account peak was of ₹10 lakh.
• Later, the subsequent lowest value reached ₹7 lakh.
• Now, the maximum drawdown is ₹3 lakh or 30%.

Know Your Numbers Before You Put Capital to Work

Understanding drawdown can help traders assess how much capital an account or strategy could lose during a period of decline. Trade246 offers a range of “pre-trade planning calculators“. Use them to estimate margin requirements, potential P&L, brokerage, and other trading parameters.

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