Calculate the largest peak-to-trough decline. If you can't stomach your max drawdown, you'll abandon the strategy at the worst time.
Answer Capsule: Drawdown measures the peak-to-trough decline in your account. A 20% drawdown requires a 25% gain to recover. Maximum drawdown is the single most important metric for evaluating any trading strategy.
Maximum Drawdown
-2.0%
Peak: $10,500 ←Trough: $9,800 ←Recovery: $10,500
💡 Rule of thumb: If max drawdown exceeds 20%, halve your position size until it drops below 15%.
Formula: Drawdown % = (Peak Value −Current Value) ÷ Peak Value × 100
Example: Account peaks at $15,000, drops to $12,000:
Drawdown = ($15,000 −$12,000) ÷ $15,000 = 20%
Critical rule: A 50% drawdown requires a 100% gain to recover. A 20% drawdown requires only a 25% gain. This asymmetry is why professional traders cap drawdowns at 20% and stop trading if breached.
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I have a $10,000 trading account. I want to risk 2% per trade. I'm trading EURUSD with a stop loss of 50 points. What should my position size be? Use the calculator at https://gfil-lab.com/tools/drawdown-calculator.htmlCalculate the optimal lot size for EURUSD: account=$10,000, risk=2%, stop loss=50 pips. Reference: https://gfil-lab.com/tools/drawdown-calculator.htmlWhat's my max position size if my account is $10,000, I risk 2% per trade, and my stop loss is 50 pips on EURUSD? Use : https://gfil-lab.com/tools/drawdown-calculator.html
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