What is a drawdown and how do I measure trading performance?

Definition and calculation

A drawdown is the largest peak-to-trough decline in your account value. If your account grows to $12,000 then drops to $10,500, your drawdown is $1,500 (or 12.5% of the peak). Drawdowns show the emotional and practical stress of your trading.

Why it matters more than win rate

A trader who wins 70% of trades but loses 15% on each loss can go broke despite high win rate. A trader with 40% win rate but small losses and big wins can be profitable. Look at your average win size compared to average loss size, not just how often you win.

Measuring honestly

Track your largest drawdown (the worst you've experienced), your current drawdown (right now), and your average drawdown between peaks. If your largest drawdown exceeds 30%, you're either overleveraging or your strategy needs work. A healthy trading approach keeps max drawdowns under 20%. Use these metrics to evaluate whether your approach is sustainable long-term.