Risk Management5 min read
Maximum Drawdown: What It Is and Why It Kills Accounts
Maximum drawdown is the worst peak-to-trough decline. Learn why this metric matters more than annual returns. Measure it, size for it, and survive the worst.
What Is Maximum Drawdown?
Maximum drawdown (MDD) is the largest percentage decline from a peak to a trough in your account equity. If your account peaks at $10,000 and drops to $6,000, your MDD is 40%. This is the single most important risk metric in trading.
Why MDD Matters More Than Returns
- A 50% drawdown requires a 100% gain to recover
- A 90% drawdown requires a 900% gain to recover
- Drawdowns are psychologically devastating — most traders abandon their strategy during a 30%+ drawdown
- Institutional investors typically have MDD limits of 15-20%
Managing Maximum Drawdown
- Risk per trade: Keep it to 1-2% of account to limit drawdowns
- Diversification: Trade multiple non-correlated instruments to smooth equity curve
- Stop trading after 3 consecutive losses — take a break and reassess
- Backtest your strategy and measure MDD — if MDD exceeds 25%, reduce position size
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.