A drawdown is the decline in account equity from a previous peak to a subsequent low, normally expressed as a percentage of that peak. If an account grows to $10,000 and then falls to $8,000, it is in a 20% drawdown until equity makes a new high.
Drawdowns are not a malfunction — every strategy, including profitable ones, spends much of its life below its last equity peak. What matters is whether the depth and duration of drawdowns stay within what the strategy’s history and your risk settings predict, or blow past them.
The recovery math is asymmetric and unforgiving: a 20% drawdown needs a 25% gain to get back to breakeven, and a 50% drawdown needs 100%. This asymmetry is the core argument for small per-trade risk and for knowing a strategy’s historical drawdown profile before trading it live.
Equity peaks at $10,000 and falls to $8,000: (10,000 − 8,000) ÷ 10,000 = 20% drawdown. Recovery requires a 25% gain ($2,000 on $8,000), not 20%.