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Drawdown Explained: How Much Can You Lose, and How Long to Recover?

Updated October 27, 2026 · By the Pips & Gold team

Drawdown is the drop in your account from its highest point to its lowest point before it recovers. It is the most important number in trading that beginners ignore. Profit tells you what went right; drawdown tells you what it cost and whether you could have survived it. This guide explains how to measure it, why losses are harder to recover than they look, and how to keep drawdowns to a size you can live with.

By Pips & Gold teamLast updated October 21, 20268 min readLevel: All levels

Key takeaways

Drawdown = the fall from a peak to the lowest point that follows, usually shown as a % of the peak.
Losses need bigger gains to recover: a 20% loss needs +25%, and a 50% loss needs +100%.
Equity drawdown includes open trades and is the honest measure for grid and basket EAs. Balance drawdown can hide large open losses.
Losing streaks are normal. At 2% risk per trade, ten losses in a row is a drawdown of about 18%.
Plan for live drawdowns deeper than the backtest, and set a stop point before you start.

What drawdown means

Imagine your account grows from $10,000 to $12,000, then falls to $9,600, then recovers. The peak is $12,000 and the trough is $9,600. The drawdown is measured from the peak, not from your deposit.

Drawdown is measured from the highest point reached, so you can be in a drawdown while still above your starting balance.

Worked example

Measuring a drawdown

Using the numbers above:

Drawdown ($) = peak − trough = $12,000 − $9,600 = $2,400 Drawdown (%) = $2,400 ÷ $12,000 × 100 = 20% Note: measured from the $10,000 deposit it looks like only −4%. That hides the real damage.

The maximum drawdown is the largest such drop over the whole period. The drawdown duration (time under water) is how long it took to get back to the old peak. Both matter: a 15% drop that lasts seven months tests your patience as much as a 30% drop that lasts two weeks.

The maths of recovery: why losses hurt more than gains help

After a loss, you have less money working for you, so you need a bigger percentage gain to get back. The formula is simple:

Worked example

Gain needed to recover

Gain needed = loss ÷ (1 − loss).

Lose 10%: 0.10 ÷ 0.90 = 11.1% gain needed Lose 20%: 0.20 ÷ 0.80 = 25.0% Lose 30%: 0.30 ÷ 0.70 = 42.9% Lose 50%: 0.50 ÷ 0.50 = 100% Lose 75%: 0.75 ÷ 0.25 = 300%

Small losses are easy to recover. Large ones can take years, or never recover.

This is why professional traders focus on keeping losses small. Avoiding a 50% loss matters far more than squeezing an extra few percent of profit.

Balance drawdown vs equity drawdown

MetaTrader 5 reports two kinds of drawdown:

Balance drawdown counts closed trades only.
Equity drawdown includes the floating profit or loss of trades that are still open.

For an EA that closes each trade with a stop loss, the two are usually close. For grid, averaging or basket EAs, which keep adding trades while price moves against them, they can be very different. The balance can look smooth while the equity dips deeply, until a basket is closed at a large loss.

Worked example

Hidden drawdown in a basket

A grid EA on a $10,000 account opens buy trades as gold falls. At the worst point, it holds 0.10 + 0.16 + 0.26 lot (0.52 lot in total, 52 ounces), with an average entry $14 above the current price. No trade has closed yet.

Floating loss = 52 oz × $14 = $728 Equity drawdown = $728 ÷ $10,000 = 7.3% Balance drawdown = 0% (nothing closed) If gold drops another $10 before it turns: Floating loss = 52 × $24 = $1,248 → 12.5%

That's why the equity number is the honest one for these EAs, and why each mode of our grid-style EAs has a hard account stop.

Also in the MT5 reportMT5 also shows "absolute drawdown" (how far the account fell below the starting deposit) and "relative drawdown" (the largest drop as a percentage). When people compare EAs, the maximal or relative equity drawdown is usually the fairest number.

Losing streaks: what's normal

Even a good strategy has runs of losing trades. With a 50% win rate, the longest losing streak you should expect over 500 trades is around 9 in a row (roughly log₂ of 500). With a 40% win rate it is longer.

Losses in a row	Drawdown at 1% risk	At 2% risk	At 5% risk
5	4.9%	9.6%	22.6%
10	9.6%	18.3%	40.1%
15	14.0%	26.1%	53.7%

Calculated as 1 − (1 − risk)ⁿ, with each loss taken from the reduced balance.

Worked example

A 10-trade losing streak

You risk 2% of your balance on each trade, starting at $10,000.

After 10 losses: $10,000 × 0.98^10 = $10,000 × 0.817 = $8,171 Drawdown = 18.3% Gain needed to recover = 0.183 ÷ 0.817 = 22.4% At 5% per trade: $10,000 × 0.95^10 = $5,987 → drawdown 40.1%

Risk per trade is the main control you have over drawdown. Our guide to lots and position sizing shows how to set it.

How to judge an EA's drawdown honestly

Look at equity drawdown on real-tick tests, over a long period that includes rough markets.
Compare tuning and unseen periods. If drawdown jumps in the unseen period, the settings may be fitted to the past.
Check the duration. How long was the longest time under water? For example, a multi-currency EA we tested once spent about 7 months (215 days) below its previous high in testing, and 9 of its 25 test months lost money.
Expect worse live. A common rule of thumb is to plan for a live drawdown of 1.5 to 2 times the backtest's maximum. It isn't a law, but it's a safer plan than expecting the backtest to repeat.
Know the worst case. For grid and no-stop-loss EAs, the worst case can be much bigger than any drawdown in the test. Ask what happens if price moves one way for days.

Smooth curves are a warning signAn equity curve with almost no dips usually means hidden risk (a grid or martingale holding losers), a very short test, or settings fitted to the past. Real strategies have visible losing periods.

Real drawdowns from our own EA tests

To show what drawdowns look like in practice, here are the deepest drops from our own backtests (real ticks, $10,000 test accounts). These are tests on past prices, not live results, and live drawdowns can be deeper.

EA and mode	Deepest drop in testing	What it tells you
Gold EA, aggressive mode (older, harder test)	30.1% (worst month -14.5%)	Came within 1 point of its 31% account stop.
Gold EA, balanced mode (older test)	24.2% (worst month -11.1%)	Higher-risk modes really are higher risk.
Multi-currency EA, aggressive mode (2 years)	25.4% (worst month -14.3%)	Even with a stop on every trade, losing months cluster.
EURUSD grid EA, aggressive mode (2026)	23.3%	Close to its 25% cap: grids run near their limits.
Gold trend EA (gold crash, Jan-Feb 2026)	9.7% to 11.9% in three weeks	Sharp market crashes create fast drawdowns.

Notice two things. First, the more aggressive mode always had the deeper drawdown. Second, the worst months were several times larger than the average month. If an EA averages +1.5% a month, a −10% month is not a malfunction; it's part of the deal. Before you run any EA, ask yourself whether you could watch your account fall by its worst tested drawdown, and then some, without changing the plan.

The emotional sideMost traders find that the hardest part of a drawdown is not the money but the doubt. That's when people switch off a strategy at the bottom, double their lot size, or jump to a new EA. Knowing the tested numbers in advance helps you tell the difference between normal pain and a real problem.

How to keep drawdown under control

Risk a small % per trade. Many traders use 0.5-2%.
Set a daily loss limit, for example 3-5%, after which you (or the EA) stop for the day.
Set a maximum drawdown stop, for example 15-25% from the peak, at which you stop and review. Our EAs have this built in as the Account Guardian.
Limit open exposure. Don't run several EAs on the same symbol in the same direction without adding up the total risk.
Reduce size after a big drawdown until you understand why it happened. Never increase size to recover faster.

Decide your stop point before you startWrite it down: "If this account falls 20% from its high, I stop the EA and review." Decisions made in advance are much easier to follow than decisions made in the middle of a loss.

Going deeper: notes for experienced traders

Return vs drawdown. The recovery factor (net profit ÷ max drawdown) and the Calmar ratio (annual return ÷ max drawdown) compare strategies on risk-adjusted terms.
Monte Carlo drawdowns. Shuffle trade order to estimate the distribution of maximum drawdowns; the 95th percentile is a more sober planning number than the single backtest value.
Correlation across EAs. Two gold EAs that both trade the Asian session can draw down at the same time. Combine their equity curves before sizing.
Ulcer index. Measures depth and duration of drawdowns together, useful when time under water matters to you.
Stops don't cap losses perfectly. Weekend gaps and fast news can fill stops far beyond the set price. Leave a margin of safety below any hard limit.

Common mistakes

Measuring drawdown from the deposit. Always measure from the highest point the account reached.
Looking only at balance drawdown. For grids and baskets, equity drawdown shows the real risk.
Raising risk to recover faster. This is how drawdowns turn into blown accounts.
Expecting the live drawdown to match the backtest. Plan for deeper and longer.
Ignoring time under water. Months without a new high are hard to sit through. Know if you can.
Stacking several EAs without adding up the risk. Correlated EAs can all lose at once.

Printable checklist

I know my risk per trade (0.5-2% is a common range).
I have a daily loss limit and I know what happens when it's hit.
I have a maximum drawdown stop point, written down.
I check equity drawdown, not just balance drawdown.
I know the backtest's max drawdown and longest time under water.
I plan for a live drawdown deeper than the backtest.
I added up the total risk of all my EAs and open trades.
I will reduce size, never increase it, after a big drawdown.

Frequently asked questions

What is a good maximum drawdown?

It depends on your goals and nerves. Many traders aim to keep maximum drawdown under 20-25%. Lower drawdowns usually mean lower returns as well.

What is the difference between balance and equity drawdown?

Balance drawdown counts only closed trades. Equity drawdown includes open trades' floating losses, so it shows the real risk for EAs that hold several trades at once.

How long does it take to recover from a drawdown?

It depends on the size and the strategy's returns. A 20% drawdown needs a 25% gain; at 1% a month that's over 22 months. Bigger drawdowns can take years.

Is a 0% drawdown possible?

Not in real trading. An EA showing almost no drawdown is usually hiding risk, has a very short test, or is fitted to the past.

Should I stop an EA after a drawdown?

Decide in advance. If the drawdown is within what testing showed, stopping may lock in the loss. If it's well beyond the tested worst case, stop and review.

Does a stop loss limit my drawdown?

It limits each trade's planned loss, but gaps and slippage can make the real loss bigger, and many losses in a row still add up.

Risk warning: most EAs lose money in the long runTrading forex and gold with leverage is high risk and you can lose all of your deposit. Most Expert Advisors do not make money over the long term. Every result shown here is a backtest on past prices, not live trading, and past results do not promise future results. Live results will be different because of spreads, commission, slippage and changing markets. This is not financial advice. Test on a demo account first and only trade money you can afford to lose. Full risk disclaimer.

Sources and further reading

This guide is general education, not financial advice. Broker terms differ; always check your own broker's contract specifications.