Drawdown Management

What Is Drawdown?

Drawdown measures the decline from your account's peak value to its lowest point before a new peak is reached. If your account grows from £10,000 to £12,000 and then drops to £10,800, your drawdown is £1,200 or 10% (from the peak of £12,000).

Maximum drawdown — the largest peak-to-trough decline — is one of the most important metrics for evaluating any trading approach. A strategy that returns 30% annually with a 50% maximum drawdown is far riskier than one returning 15% with a 10% maximum drawdown.

Why Drawdowns Are Dangerous

The mathematics of recovery are brutal. A 10% drawdown requires an 11% gain to recover. A 20% drawdown needs 25%. A 50% drawdown requires 100% — you need to double your remaining capital just to get back to where you started. This is why preventing deep drawdowns matters more than chasing high returns.

Setting Drawdown Limits

Professional traders set maximum drawdown limits in advance — and stick to them. A common approach: if your account drops 10% from its peak, reduce position sizes by half. If it drops 20%, stop trading entirely and review your strategy. These rules prevent emotional decision-making during the worst possible moments.

Daily drawdown limits are also useful. If you lose 2-3% in a single day, stop trading for that session. Bad days tend to get worse when you try to force recovery trades.

Recovery and Psychology

The hardest part of drawdowns isn't the money — it's the psychology. The urge to 'make it back' leads to larger position sizes, more aggressive trades, and abandoning your rules. This is precisely when discipline matters most.

After a significant drawdown, the best action is often to reduce size, simplify your approach, and rebuild gradually. The goal isn't to recover quickly — it's to stop the bleeding and restore confidence through consistent, small wins.