A drawdown is the fall in your account (or a strategy's equity) from a peak to a subsequent low. If your account grows to ₹2,00,000 and then falls to ₹1,60,000, you are in a 20% drawdown. Maximum drawdown is the largest such fall over a period.
Drawdowns are unavoidable in trading and investing. The question is how deep they get — because the math of recovery is unforgiving.
The recovery table
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
| 90% | 900% |
Small losses are easy to recover from. Large losses are not. This asymmetry is why professional traders care more about not losing big than about winning big.
Where drawdowns come from
- Normal losing streaks — even good strategies have them.
- Position size too large — the same streak hurts much more at higher risk per trade.
- Correlated positions — several trades losing together.
- Market regime changes — a strategy built for trends struggling in a range.
- Behavioural mistakes — revenge trading during a drawdown deepens it.
How to estimate your strategy's drawdown
- Backtest your rules and note the maximum drawdown (strategy builder).
- Assume worse live: real drawdowns usually exceed backtested ones.
- Simulate: run your statistics through the Monte Carlo simulator to see median and worst-case drawdowns.
- Ask: could I keep following the rules through that drawdown — financially and emotionally?
Rules to control drawdowns
- Small risk per trade — 0.5–1% for most traders. See position sizing explained.
- Drawdown-based size reduction — for example, cut size in half after a 10% drawdown and return to normal only after recovering half of it.
- Daily and weekly loss limits — stop the bleeding early.
- Diversify across uncorrelated setups or markets.
- Pause and review after a set drawdown instead of trading harder.
Drawdowns for long-term investors
Investors face drawdowns too — broad equity markets have fallen 30–60% in major crises before recovering over time. Investors manage them with asset allocation (equity, debt, gold), an emergency fund so they never have to sell at the bottom, and continuing SIPs through falls. Read SIP in a falling market and check the max drawdown of any fund on our mutual fund pages.
Psychology during a drawdown
Drawdowns test discipline. Common reactions — increasing size to recover faster, abandoning the strategy, or jumping to a new "better" one — usually make things worse. Your trading journal helps you check whether the drawdown is normal for your strategy or a sign that something has changed.
Key takeaways
- Drawdown = fall from peak; recovery requires a larger percentage gain than the loss.
- Keep losses small — a 50% loss needs a 100% gain.
- Estimate drawdowns with backtests and Monte Carlo, then size accordingly.
- Reduce size during drawdowns instead of trading harder.
Frequently asked questions
What is a good maximum drawdown?
It depends on the strategy and your tolerance. Many traders aim to keep maximum drawdowns below 20–25%.
How long does it take to recover from a drawdown?
It depends on the depth and your strategy's returns. Deep drawdowns can take years to recover, which is why prevention matters.
Should I stop trading during a drawdown?
Reduce size and review. If the drawdown is within the strategy's normal range, continue carefully; if it is beyond, pause and investigate.
How can I see a fund's maximum drawdown?
Each fund page in our mutual funds section shows the maximum drawdown from historical NAV.
BullishBrush provides stock market education only. We are not a SEBI-registered investment adviser or research analyst and do not give buy/sell recommendations or tips. Investments in securities markets are subject to market risks; read all related documents carefully before investing. Past performance does not guarantee future results.