GLOSSARY // Risk & Psychology
Drawdown
Drawdown is the decline from an account's equity peak to its subsequent low, quoted as a percentage of that peak. An account that grows to $50,000 and falls to $40,000 is in a 20% drawdown even if it started at $30,000.
Losses and recoveries are asymmetric: the gain needed to recover equals drawdown / (1 - drawdown). A 10% drawdown needs an 11.1% gain to get back to the peak, 20% needs 25%, 33% needs 50%, and a 50% drawdown needs a full 100% gain. The math gets steeper faster than the loss does, which is the core argument for risking small fractions per trade.
An account peaks at $50,000, then a losing streak takes it to $35,000 — a 30% drawdown. Recovery requires $15,000 of gains on a $35,000 base, a 42.9% return. At a realistic 2% average monthly return, that is roughly a year and a half just to break even.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.