What is drawdown and why does it matter
If you trade with a prop firm, drawdown is the number that decides whether you keep your account or lose it. It’s that simple.
Drawdown measures the decline from the highest point of your equity to the current point. Prop firms use it as the main rule to evaluate your risk management: if your drawdown exceeds the allowed limit, you lose the account immediately.
The problem is that many traders don’t understand exactly how it’s calculated. Some confuse it with accumulated losses, others ignore that different types exist, and most realize they’ve breached the limit when it’s already too late.
In this guide, you’ll learn the exact formulas, see examples with real numbers, and discover tools that automate the calculation.
Types of drawdown you need to know
Before diving into formulas, it’s crucial to understand that there isn’t just one type of drawdown. Prop firms and monitoring platforms handle at least two:
Portfolio drawdown (full account)
This is the most common drawdown. It measures the decline of your account’s total equity from its all-time high. This is what prop firms use as their main rule.
Example: Your account reached a peak equity of $52,000. Now your equity is $47,500. Your portfolio drawdown is the percentage difference between both values.
Strategy drawdown
If you use Expert Advisors (EAs) or have multiple strategies identified by magic number in MetaTrader, strategy drawdown measures the decline of each individual strategy’s profit.
This matters because one strategy could be in severe drawdown while another compensates for the losses, masking the problem until it’s too late.
Formulas for calculating drawdown
Portfolio drawdown formula
Drawdown (%) = ((Peak Equity - Current Equity) / Peak Equity) * 100Where:
- Peak Equity = The maximum value your equity reached (excluding deposits and withdrawals)
- Current Equity = The current value of your equity, including open positions
Strategy drawdown formula
Drawdown (%) = ((Peak Profit - Current Profit) / Peak Profit) * 100Where:
- Peak Profit = The maximum accumulated profit of that strategy
- Current Profit = The current profit of the strategy (can be negative)
Daily drawdown formula
Daily DD (%) = ((Start of Day Equity - Minimum Equity of the Day) / Start of Day Equity) * 100Daily drawdown resets every day at a specific time (generally at server close, usually 5 PM EST). This is the rule that most traders violate without realizing it.
Practical example with real numbers
Let’s walk through a complete scenario so you can see exactly how it works.
Initial data
- Starting capital: $50,000
- Maximum drawdown limit: 10% ($5,000)
- Daily drawdown limit: 5% ($2,500)
Trade sequence
Day 1: You open three trades. At end of day:
- Realized profit: +$1,200
- Equity at close: $51,200
- New peak equity: $51,200
- Current drawdown: 0%
Day 2: A large trade goes against you.
- Minimum equity of the day: $49,800
- Equity at close: $50,300
- Peak equity remains at: $51,200
Let’s calculate the drawdown:
Max DD = (($51,200 - $49,800) / $51,200) * 100 = 2.73%
Daily DD = (($51,200 - $49,800) / $51,200) * 100 = 2.73%We’re fine. Both below the limit.
Day 3: Bad day. Multiple losing trades.
- Minimum equity of the day: $47,600
- Equity at close: $48,200
- Peak equity remains at: $51,200
Max DD = (($51,200 - $47,600) / $51,200) * 100 = 7.03%
Daily DD = (($50,300 - $47,600) / $50,300) * 100 = 5.37%Alert: Day 3’s daily drawdown was 5.37%, which exceeds the 5% limit. In many prop firms, this account would already be eliminated. The maximum drawdown is at 7.03%, still within the 10% limit, but the daily drawdown is what got you eliminated.
This is exactly the type of situation that a real-time monitoring tool can prevent with alerts before it’s too late.
Why you must exclude deposits and withdrawals
A very common mistake is including deposits and withdrawals in drawdown calculations. Let’s see why this distorts the numbers:
Imagine your account has equity of $48,000 and your peak was $50,000. Your real drawdown is:
DD = (($50,000 - $48,000) / $50,000) * 100 = 4%Now you deposit $5,000. Your equity rises to $53,000. If you include the deposit:
"Incorrect" DD = (($53,000 - $53,000) / $53,000) * 100 = 0%It looks like your drawdown disappeared, but you still have $2,000 in trading losses. The deposit didn’t “cure” your drawdown; it just disguised it.
Prop firms calculate drawdown excluding deposits and withdrawals, and you should do the same. To understand more common mistakes, check our article on drawdown mistakes in prop firm evaluations.
Tools for calculating your drawdown
Manual method (not recommended)
You can use an Excel spreadsheet tracking:
- Equity at the start of each day
- Equity at close
- Intraday minimum equity
- Historical peak equity
The problem: it’s tedious, error-prone, and doesn’t alert you in real time.
Free drawdown calculator
We’ve created a free drawdown calculator where you can enter your numbers and instantly get:
- Current drawdown in percentage and dollars
- How much margin you have left before breaching the limit
- Daily drawdown vs maximum drawdown
It’s perfect for a quick calculation, but it doesn’t replace automated monitoring.
Automated monitoring with Trading Monitor
For traders who don’t want to rely on manual calculations, Trading Monitor connects to your MT4/MT5 account, syncs data every 60 seconds, and calculates drawdown automatically:
- Portfolio drawdown and strategy drawdown (by magic number)
- Configurable alerts when you approach the limit (e.g., at 70%, 85%, and 95%)
- Complete history to analyze your risk management
- Automatically excludes deposits and withdrawals
If you want to see how it works, create a free account.
Formula summary
| Type | Formula |
|---|---|
| Max DD | ((Peak Equity - Current Equity) / Peak Equity) * 100 |
| Daily DD | ((Start of Day Equity - Min Equity of Day) / Start of Day Equity) * 100 |
| Strategy DD | ((Peak Profit - Current Profit) / Peak Profit) * 100 |
Next steps
Now that you know how to calculate drawdown, we recommend:
- Try the free calculator with your current account numbers
- Review the drawdown rules of major prop firms to understand exactly which limits apply to your case
- Set up automatic alerts so you’re never surprised by a drawdown approaching the limit
Drawdown doesn’t forgive. But with the right tools, you can manage it with confidence.