What Is Maximum Drawdown?
Maximum drawdown is one of the most important measurements of risk in trading.
It shows the largest decline in a trading account from a previous peak to the lowest point that follows before the account reaches a new high.
In simple terms, maximum drawdown answers an important question:
How much did the account fall during its worst losing period?
A trading strategy can produce impressive profits while still exposing an account to excessive risk.
That is why traders should never evaluate a strategy based only on total profit.
Maximum drawdown provides the other side of the picture: how much historical risk was experienced while producing those returns.
This becomes particularly important when evaluating Expert Advisors, backtests, copy-trading systems, and aggressive trading strategies.
If you are still developing your overall risk framework, read our XAUUSD Risk Management Guide for a practical introduction to position sizing, stop losses, account exposure, and leverage.
Important: This article is for educational purposes only and is not financial or investment advice. Historical performance and historical drawdown do not guarantee future results.
Maximum Drawdown Example
Imagine that a trading account develops like this:
- Starting balance: $10,000
- Account grows to: $12,000
- Account then falls to: $9,000
- Account later recovers to: $13,000
The important values are the previous peak of $12,000 and the subsequent low of $9,000.
The monetary drawdown is:
$12,000 − $9,000 = $3,000
The percentage drawdown is:
($3,000 ÷ $12,000) × 100 = 25%
Therefore:
Maximum Drawdown = 25%
Notice that the calculation is based on the decline from the previous peak—not from the original $10,000 deposit.
Maximum Drawdown Formula
A simplified maximum drawdown formula is:
Maximum Drawdown (%) = (Peak Value − Trough Value) ÷ Peak Value × 100
Where:
Peak Value = the highest account value before the decline
Trough Value = the lowest account value reached after that peak
For example:
Peak equity = $20,000
Lowest subsequent equity = $17,000
Maximum drawdown:
($20,000 − $17,000) ÷ $20,000 × 100
= 15%
The account therefore experienced a 15% peak-to-trough decline during that period.
MetaTrader 5 uses similar peak-to-trough concepts in its drawdown statistics. Its official Strategy Tester report documentation explains how balance and equity drawdowns are calculated.
Why Maximum Drawdown Matters
Many beginners concentrate almost entirely on profits.
For example, imagine two Expert Advisors.
EA A
Annual historical return: 40%
Maximum drawdown: 10%
EA B
Annual historical return: 45%
Maximum drawdown: 60%
At first glance, EA B may appear better because it generated a slightly higher return.
But it also experienced a dramatically larger decline in capital.
The more useful question becomes:
Was the additional return worth the additional risk?
This is why maximum drawdown should always be analyzed alongside profitability.
It helps reveal the risk characteristics behind the headline performance numbers.
Drawdown vs Maximum Drawdown
Drawdown and maximum drawdown are related, but they are not exactly the same.
Drawdown
A drawdown is any decline from a previous account peak.
A trading account may experience many separate drawdowns.
For example:
- First drawdown: 4%
- Second drawdown: 8%
- Third drawdown: 6%
- Fourth drawdown: 14%
Maximum Drawdown
Maximum drawdown is the largest drawdown recorded during the measurement period.
Using the example above:
Maximum Drawdown = 14%
It represents the worst peak-to-trough decline experienced during the period being analyzed.
Balance Drawdown vs Equity Drawdown
One of the most important concepts traders should understand is the difference between balance drawdown and equity drawdown.
Balance Drawdown
Your account balance generally changes when trades are closed.
Balance drawdown therefore reflects losses that have already been realized in the account balance.
For example:
Account balance: $10,000
Closed losing trades reduce the balance to: $9,000
Balance decline:
10%
Equity Drawdown
Equity also reflects floating profits and floating losses from currently open positions.
An account might therefore show:
Balance: $10,000
Open floating loss: −$2,000
Equity: $8,000
Even though the balance remains $10,000, the account is already experiencing significant floating losses.
In this simplified example, the equity decline is:
20%
This is why equity drawdown can reveal risk that may not be obvious when looking only at closed trades.
MetaTrader 5’s official Strategy Tester report separates Balance Drawdown and Equity Drawdown, allowing traders to inspect both realized and floating account declines.
Absolute, Maximal, and Relative Drawdown
MetaTrader reports can contain several drawdown measurements.
Understanding the difference helps you interpret an EA backtest correctly.
Absolute Drawdown
Absolute drawdown measures how far the account dropped below the initial deposit.
Example:
Initial deposit: $10,000
Lowest level below the starting deposit: $9,200
Absolute drawdown:
$800
However, absolute drawdown does not always reveal the full historical risk.
Imagine an account growing from:
$10,000 → $20,000
and then falling to:
$13,000
The account remains above its original deposit, but it has still suffered a significant decline from its previous peak.
Maximal Drawdown
Maximal drawdown measures the largest monetary decline between a local account high and the following low.
Example:
Peak: $15,000
Trough: $11,000
Maximal drawdown:
$4,000
Relative Drawdown
Relative drawdown expresses the peak-to-trough decline as a percentage.
Using the same example:
($15,000 − $11,000) ÷ $15,000 × 100
= 26.67%
Percentage drawdown is particularly useful because it makes it easier to compare trading accounts of different sizes.
Why Equity Drawdown Deserves Special Attention
A trading strategy can sometimes produce a smooth-looking balance curve while hiding substantial floating losses.
This is especially relevant for systems that:
- Hold losing trades for extended periods
- Use wide stop losses
- Average into losing positions
- Open multiple positions simultaneously
- Use grid-style entries
- Use martingale-style position sizing
- Delay closing losing positions
Imagine an EA with a $10,000 account.
Its balance remains around:
$10,500
because few losing positions have been closed.
However, its open positions temporarily push equity down to:
$7,000
Looking only at account balance could make the strategy appear relatively stable.
Looking at equity reveals a much larger temporary loss.
This distinction becomes particularly important when learning How to Backtest an Expert Advisor in MT5, because the Strategy Tester allows you to inspect both the balance and equity behavior of the EA.
Maximum Drawdown in EA Backtesting
Maximum drawdown becomes especially important when evaluating an Expert Advisor.
A MetaTrader Strategy Tester report may include statistics such as:
- Total Net Profit
- Gross Profit
- Gross Loss
- Profit Factor
- Expected Payoff
- Recovery Factor
- Balance Drawdown
- Equity Drawdown
- Maximum Drawdown
- Number of Trades
- Consecutive Wins and Losses
A common beginner mistake is selecting the EA configuration that produces the highest net profit.
That can be dangerous.
An aggressive EA configuration may produce very high historical returns because it:
- Trades larger lot sizes
- Uses more leverage
- Opens more simultaneous positions
- Accepts larger floating losses
- Uses wider stops
- Takes greater account exposure
The configuration producing the highest profit may therefore also be the configuration carrying the greatest historical risk.
For a complete testing procedure, read our guide on How to Backtest an Expert Advisor in MT5.
Example: Comparing Two EA Backtests
Suppose you test two configurations over exactly the same historical period.
Configuration A
Initial deposit: $10,000
Net profit: $5,000
Maximum drawdown: $1,000
Maximum drawdown percentage: 10%
Configuration B
Initial deposit: $10,000
Net profit: $8,000
Maximum drawdown: $5,000
Maximum drawdown percentage: 50%
Configuration B generated considerably more profit.
But it also required surviving a decline of approximately half the account value.
Configuration A generated less profit but displayed a much more conservative historical risk profile.
There is no single statistic that automatically tells you which strategy is appropriate.
Instead, traders should examine return and risk together.
What Is a Good Maximum Drawdown?
There is no universal maximum drawdown percentage suitable for every trader or strategy.
The appropriate level depends on factors such as:
- Trading strategy
- Position sizing
- Account objectives
- Risk tolerance
- Leverage
- Number of simultaneous trades
- Market volatility
- Trading frequency
However, lower drawdown generally indicates that a strategy experienced a smaller decline during its worst historical period.
The important question is:
Could you realistically tolerate that drawdown if it occurred during live trading?
And there is another important consideration:
Could you tolerate an even larger drawdown?
Historical maximum drawdown is not a guaranteed ceiling.
A strategy that experienced a 10% maximum historical drawdown could experience a 15%, 20%, 30%, or larger decline in future market conditions.
The Mathematics of Recovering From Drawdown
One reason drawdown control is so important is that recovering from a loss requires a larger percentage gain than the percentage originally lost.
| Drawdown | Gain Required to Recover |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
| 90% | 900% |
For example, suppose a $10,000 account experiences a 50% loss.
Remaining equity:
$5,000
To return from $5,000 to the original $10,000:
$5,000 ÷ $5,000 × 100 = 100%
The account now requires a 100% gain just to recover.
This asymmetric recovery requirement is one of the strongest reasons to control large losses before they occur.
Maximum Drawdown and Risk Management
Drawdown is usually the result of several interacting risk factors.
1. Position Size
Larger positions magnify both profits and losses.
Increasing lot size without adjusting the rest of the trading strategy can substantially increase drawdown.
2. Risk Per Trade
If too much of the account is exposed on each trade, even a normal losing streak can create significant account damage.
Our XAUUSD Risk Management Guide explains how position size, account risk, stop losses, and leverage work together.
3. Number of Simultaneous Trades
Opening multiple trades at the same time can increase total exposure substantially.
This becomes even more important when positions are highly correlated.
4. Leverage
Leverage allows traders to control larger market positions with smaller amounts of deposited capital.
While leverage can magnify gains, it can also magnify losses.
The amount your broker allows you to trade should therefore never be confused with the amount of risk your account can responsibly tolerate.
5. Stop-Loss Strategy
Very wide stop losses can increase the size of individual losses.
No stop loss can expose an account to potentially much larger adverse movements.
At the same time, stops that are excessively tight may cause repeated premature exits.
Stop placement should therefore be based on the logic of the trading strategy while position size is adjusted to keep risk within predetermined limits.
Maximum Drawdown and Losing Streaks
Maximum drawdown does not necessarily result from one catastrophic trade.
It can develop gradually through a sequence of ordinary losing trades.
For example, suppose a system risks approximately 2% per trade and experiences several consecutive losses.
Even when every trade follows the strategy correctly, the combined decline can become substantial.
This is why losing streak statistics matter.
A losing streak does not automatically mean that a trading system has failed.
Every strategy can experience periods when market conditions are unfavorable.
The real question is whether the system’s risk controls allow the account to survive those periods.
Maximum Drawdown and Recovery Factor
Another useful risk-performance metric is the Recovery Factor.
MetaTrader defines Recovery Factor as the relationship between absolute profit and maximum drawdown.
A simplified expression is:
Recovery Factor = Net Profit ÷ Maximum Drawdown
Example:
Net profit: $6,000
Maximum drawdown: $2,000
Recovery Factor:
3.0
Now consider another strategy:
Net profit: $6,000
Maximum drawdown: $5,000
Recovery Factor:
1.2
Both strategies produced the same profit.
However, the first strategy produced that profit while experiencing substantially less historical drawdown.
Recovery Factor therefore helps evaluate profit relative to the amount of historical decline experienced.
MetaTrader’s official Trading Report documentation also includes drawdown, recovery factor, deposit load, winning and losing streaks, and other risk statistics useful for evaluating trading performance.
Historical Drawdown Is Not a Future Drawdown Limit
This point is extremely important.
Suppose a five-year backtest shows:
Maximum Drawdown = 12%
That does not mean the strategy cannot experience:
- 15%
- 20%
- 30%
- or an even larger drawdown
in future trading.
Backtests are based on a specific combination of:
- Historical prices
- Market conditions
- Spread assumptions
- Execution assumptions
- Strategy settings
- Historical data quality
- Testing period
- Broker conditions
Future market behavior can be different.
Historical maximum drawdown should therefore be treated as an observation of what occurred during the test—not as a guaranteed maximum future loss.
Backtesting Alone Is Not Enough
A low historical drawdown does not automatically prove that an Expert Advisor is safe or profitable.
Backtesting is only one stage of EA evaluation.
After testing historical data, a useful next step is to Forward Test an Expert Advisor using a demo account.
Forward testing allows you to observe how the EA behaves using continuously changing market prices rather than only historical data.
During a forward test, monitor:
- Equity fluctuations
- Balance fluctuations
- Maximum drawdown
- Losing streaks
- Average trade duration
- Simultaneous positions
- Margin usage
- Spread sensitivity
- Execution behavior
- Slippage
- Trade frequency
The objective should not simply be to determine whether the EA makes money.
You should also understand how the EA behaves when market conditions become unfavorable.
How to Reduce Trading Drawdown
Drawdown cannot be eliminated completely.
Every trading strategy that experiences losses will eventually experience some form of drawdown.
However, excessive drawdown may sometimes be reduced by controlling account exposure.
Reduce Position Size
Smaller positions generally reduce the monetary effect of individual losing trades.
Reduce Risk Per Trade
Lower exposure on each trade may help an account survive longer losing sequences.
Limit Simultaneous Exposure
Several positions opened together can create considerably more account risk than examining each position independently might suggest.
Use Appropriate Stop Losses
A stop loss can help define planned risk.
However, traders should remember that slippage, gaps, and abnormal market conditions can sometimes cause an actual exit price to differ from the intended stop price.
Avoid Excessive Leverage
Higher leverage permits larger positions.
Larger positions mean relatively small market movements can create greater percentage changes in account equity.
Review Strategy Behavior
A sudden increase in drawdown may indicate that present market conditions differ from the environment in which the strategy historically performed well.
Risk reduction should generally begin with position sizing and exposure management rather than simply trying to increase profits.
Where to Find Maximum Drawdown in MetaTrader 5
MetaTrader 5 provides detailed reports containing risk and performance statistics.
According to MetaTrader’s official documentation, the Trading Report includes metrics and visualizations covering:
- Drawdown
- Deposit load
- Recovery Factor
- Profit Factor
- Winning and losing streaks
- Balance
- Equity
- Trading performance
The platform’s Risks section is specifically designed to visualize important risk characteristics of a trading strategy.
You can read the official documentation here:
MetaTrader 5 Trading Report – Official MetaQuotes Documentation
For EA backtesting statistics, see:
MetaTrader 5 Strategy Tester Report – Official MetaQuotes Documentation
These are useful references when interpreting the drawdown statistics displayed by MetaTrader 5.
Common Mistakes When Evaluating Maximum Drawdown
Looking Only at Net Profit
A large historical profit does not automatically mean the strategy has a good risk profile.
Always examine profit together with drawdown.
Ignoring Equity Drawdown
Balance statistics can underestimate the severity of floating losses.
Always examine equity behavior as well.
Assuming Historical Maximum Drawdown Cannot Be Exceeded
Historical maximum drawdown is not a guaranteed future limit.
Future market conditions may produce significantly larger losses.
Testing Too Short a Period
A strategy tested only during favorable market conditions can display unrealistically attractive results.
Whenever possible, evaluate a strategy across different market environments.
Increasing Lot Size Just to Improve Backtest Profit
Larger position sizes can dramatically improve historical profits while simultaneously increasing historical drawdown.
Always evaluate the effect on risk.
Ignoring Losing Streaks
Several normal losing trades occurring consecutively can create substantial account drawdown.
The maximum consecutive losses shown in a backtest can therefore provide useful additional context.
Maximum Drawdown Should Be Viewed in Context
No single statistic can completely describe a trading strategy.
Maximum drawdown should be considered alongside:
- Net profit
- Profit Factor
- Recovery Factor
- Number of trades
- Average profit
- Average loss
- Win rate
- Risk-to-reward characteristics
- Maximum consecutive losses
- Balance curve
- Equity curve
- Deposit load
- Testing period
- Market conditions
For example, a strategy showing a 5% drawdown across only 20 historical trades cannot automatically be considered superior to a strategy showing a 10% drawdown across thousands of trades and several different market environments.
The entire performance profile matters.
Frequently Asked Questions About Maximum Drawdown
What does maximum drawdown mean in trading?
Maximum drawdown measures the largest decline from a previous account peak to a subsequent low during a specific period.
Is maximum drawdown the same as loss?
No.
A normal trade loss refers to the result of an individual losing position.
Maximum drawdown measures the largest decline in the account from a previous peak.
It can result from one large loss or from a series of smaller losses.
Is balance drawdown or equity drawdown more important?
Both are useful.
Balance drawdown shows declines reflected in closed trading results, while equity drawdown can also reveal floating losses from open positions.
When evaluating an EA, examining both can provide a more complete picture.
Is 10% maximum drawdown good?
There is no universal percentage that is appropriate for every strategy.
A 10% historical drawdown must be evaluated in context, including the strategy’s return, trade count, leverage, testing period, and risk characteristics.
Historical drawdown can also be exceeded in future trading.
Can maximum drawdown be greater in live trading than in a backtest?
Yes.
Future market conditions, spreads, execution, slippage, volatility, and other factors can differ from the historical environment used in a backtest.
A historical maximum drawdown should therefore never be treated as a guaranteed future loss limit.
How can I reduce maximum drawdown?
Possible approaches include reducing lot size, lowering risk per trade, limiting simultaneous positions, controlling leverage, using appropriate stop-loss rules, and reviewing whether the strategy’s current behavior remains consistent with its intended design.
Final Thoughts
Maximum drawdown is one of the most useful risk metrics a trader can learn.
It measures the largest decline from a previous account peak to a subsequent low and helps reveal how much historical account deterioration occurred during the strategy’s worst period.
The key lesson is simple:
Do not evaluate a trading strategy by profit alone.
An Expert Advisor capable of generating substantial returns may also expose an account to substantial drawdowns.
When analyzing manual trading results, automated systems, backtests, or forward tests, examine both return and risk.
Pay particular attention to:
- Maximum drawdown
- Equity drawdown
- Position sizing
- Leverage
- Losing streaks
- Recovery Factor
- Margin exposure
If you are evaluating an automated trading strategy, continue with our guides on How to Backtest an Expert Advisor in MT5 and How to Forward Test an Expert Advisor.
And if your main market is gold, our XAUUSD Risk Management Guide explains how to control lot size, stop-loss exposure, leverage, and account risk when trading XAUUSD.
Most importantly, remember:
Historical maximum drawdown is not a guaranteed future limit.
Risk management remains essential regardless of how impressive a trading report may appear.
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