Maximum Drawdown in Trading: How to Calculate It and Stay Inside Prop Firm Limits

How to calculate maximum drawdown, balance vs equity drawdown, why recovery takes more than the loss, prop firm loss limits and habits that keep it small.

LSG Club · 17 October 2026 · 8 min read

Maximum drawdown is the number that decides whether a trader survives long enough for an edge to show. It measures the deepest fall of an account from a peak, and in a prop firm challenge it is often the rule that ends the attempt. This guide from LSG Club explains how to calculate maximum drawdown, why recovering from it is harder than it looks, how prop firm loss limits differ from it and which habits keep it small.

What is maximum drawdown in trading?

A drawdown is any decline of the account from its highest point so far until a new high is made. Maximum drawdown is the largest of those declines over the period you measure, usually shown as a percentage of the peak. It tells you the worst loss you would have experienced if you had started at the worst possible moment.

Peak — the highest balance (or equity) reached before the decline.
Trough — the lowest point before the account climbs back above that peak.
Drawdown — the fall from peak to trough, in money and as a percentage of the peak.
Recovery — the climb back to the old peak; until then the account is still in drawdown.

Maximum drawdown complements metrics such as profit factor and win rate. Those describe how much a strategy earns on average; drawdown describes how painful the path is. Two records with the same profit can have very different maximum drawdowns, and the deeper one is far harder to trade in real life.

How to calculate maximum drawdown

The formula is maximum drawdown = (trough value − peak value) ÷ peak value, taken for the largest such fall in the period. You walk through the balance history, remember the highest value so far and record how far below it the account goes.

A worked example

The following balance path is a hypothetical illustration of the arithmetic, not a real account:

The account starts at $10,000 and rises to $11,200 — the first peak.
A losing week takes it down to $10,300 — a drawdown of (10,300 − 11,200) ÷ 11,200 ≈ −8.0%.
It recovers to a new peak of $11,800, then falls to $10,500 — a drawdown of (10,500 − 11,800) ÷ 11,800 ≈ −11.0%.
It never falls further before the end of the period, so the maximum drawdown is about −11.0%, even though the account finished in profit.

Balance drawdown vs equity drawdown

Balance drawdown uses closed trades only. Equity drawdown also includes the floating result of open positions, so it is deeper whenever a trade goes against you before it closes. Many prop firms measure their limits on equity, which means a position that is temporarily deep in loss can breach a rule even if it would have recovered. Know which one your firm uses.

Deposits and withdrawals

A withdrawal lowers the balance but is not a trading loss, and a deposit raises it without being a profit. Count them as cash flows, not as drawdown or gains, otherwise the statistics are distorted. A good journal separates the two automatically.

Why drawdown is harder to recover from than it looks

Losses and gains are not symmetric. After a fall, the account needs a larger percentage gain to return to the peak, because that gain is calculated on a smaller balance:

−10% needs about +11.1% to recover
−20% needs +25%
−30% needs about +42.9%
−50% needs +100%

This is the main argument for keeping drawdowns shallow: a strategy that can recover from −10% in a few good weeks may need months to recover from −30%, and the psychological pressure in between leads many traders to break their own rules.

How risk per trade shapes drawdown

Every strategy has losing streaks. At a 40% win rate, any given six trades are all losers about 4.7% of the time (0.6 to the sixth power), so long streaks are a normal part of trading, not a rare event. What changes is how much each streak costs:

10 losses in a row at 1% risk per trade — about −9.6% (each loss is 1% of a slightly smaller balance).
10 losses in a row at 2% risk — about −18.3%.
10 losses in a row at 5% risk — about −40.1%, which then needs roughly +67% to recover.

Use the position size calculator to turn a fixed risk percentage into a lot size for each trade, and the guide on how to calculate position size in forex for the details.

Maximum drawdown vs prop firm loss limits

Prop firm challenges usually have two loss rules, and they are not the same as maximum drawdown. Each firm defines them in its own way and changes them from time to time, so always read your firm’s current rules page before trading.

Maximum loss — the overall floor the account may not go below. Some firms fix it from the starting balance (static); others let it follow the highest balance or equity (trailing), which makes it tighter after every new high.
Daily loss — a limit on how much may be lost within one trading day. Firms differ on whether it is measured from the start-of-day balance or equity and on when the day resets.
Minimum trading days and a profit target — the rules that decide passing, while the loss limits decide failing.

A practical way to stay inside these limits is to set your own, tighter ones: stop trading for the day well before the daily limit, and reduce risk per trade once the account is a set distance from the overall floor. The articles on FTMO challenge journaling and on a prop firm trading journal show how to record a challenge so these numbers stay visible during the day.

Habits that keep maximum drawdown small

Risk a fixed small percentage per trade and calculate the lot size every time, instead of trading a fixed lot.
Set a daily stop: a number of losses or a percentage after which you close the platform for the day.
Cut size after a drawdown threshold, for example halving risk once the account is a set distance below its peak, and restore it only after a recovery.
Limit correlated positions — two trades on pairs that move together are one larger trade in disguise.
Be careful around high-impact news, when spreads widen and stops can fill far from their level.
Never move a stop further away to avoid a loss; that is how small, planned losses become the deepest drawdowns.

Trading leveraged products carries a high risk of loss, and no rule removes drawdowns entirely. The goal is to keep them within a range you can survive and keep following your plan through.

Tracking drawdown and prop limits in a trading journal

The LSG Club journal calculates maximum drawdown in money and in percent from your trades, draws the equity curve with the drawdown from the balance peak, and keeps deposits and withdrawals out of both profit and drawdown. For prop accounts it has a free challenge tracker:

Enter the firm, the phase, the account size and the rules — profit target, daily loss limit, maximum loss and trading days.
Link the challenge to a journal account, and the balance, daily loss and trading days are calculated from its trades, with a warning when the daily limit is breached.
The overall floor is calculated from the starting balance; if your firm uses a trailing limit, keep an eye on its own dashboard as well.
See it first in the journal demo or read more on the prop firm trading journal page.

If you want the club’s AI to trade an FTMO account, LSG Algo Funded applies the club’s risk settings with a margin below FTMO’s limits; FTMO’s rules remain your responsibility, and passing a challenge is never guaranteed.

Maximum drawdown FAQ

What is a good maximum drawdown?

There is no universal number; it depends on the strategy and on your own tolerance. A useful test is whether you would keep following the plan through the deepest drawdown your history shows. For prop accounts, the firm’s maximum loss sets a hard ceiling, and your own limit should sit well inside it.

What is the difference between drawdown and daily loss?

Drawdown is measured from a peak to a trough over any length of time. Daily loss only counts what is lost within one trading day, measured from the firm’s start-of-day reference. A trader can respect every daily limit and still reach the overall maximum loss over several bad days.

Does maximum drawdown include open trades?

Balance drawdown does not; equity drawdown does. Many prop firms check limits on equity, so a floating loss can count even if the trade later closes in profit.

How do I reduce my maximum drawdown?

Lower the risk per trade, set a daily stop, avoid correlated positions and never widen a stop. Then review your drawdowns in the journal to see whether they came from normal losing streaks or from rule breaks.