Drawdown Explained: The Number Bot Sellers Hope You Ignore

Sales pages lead with profit. The number that tells you whether you could have lived through that profit is drawdown.

What drawdown is

Drawdown is the fall from a high point in an account to the next low point, shown as a percentage. If an account grows to $10,000 and then falls to $7,000 before recovering, the drawdown was 30%.

Maximum drawdown is the largest such fall in the account's history.

Why it matters more than profit

A bot that made 100% in a year with a 70% drawdown along the way was, at one point, a few bad trades from zero. The profit happened. So did the near miss. If you had started on the wrong day, you would have lived through the fall without the gains that came before it.

The recovery problem

Losses and gains are not symmetrical:

• A 10% loss needs an 11% gain to recover.
• A 25% loss needs 33%.
• A 50% loss needs 100%.
• A 75% loss needs 300%.

The deeper the drawdown, the harder the climb back.

Balance drawdown and equity drawdown

This is the part many buyers miss.

• Balance changes only when a trade is closed.
• Equity includes trades that are still open.

A bot that never closes a losing trade can show a tiny balance drawdown while its equity is deep under water. Grid and martingale systems work this way. The reported drawdown looks small right up to the moment the account is wiped out.

Always ask for equity drawdown. If only balance drawdown is shown, assume the equity figure is worse.

What is a reasonable number?

There is no single correct figure, and anyone who gives you one is guessing about your situation. A few honest guides:

• The drawdown you see in a track record is the minimum you should expect. The future can always be worse.
• Ask yourself whether you would keep the bot running through that fall with your own money. Most people stop at the bottom, which locks in the loss.
• A long history with a moderate drawdown tells you more than a short history with a tiny one.

Questions to ask

1. What is the maximum equity drawdown, not balance drawdown?
2. How long did the worst drawdown last before a new high?
3. Does the bot use a stop loss on every trade?
4. What happens to open trades over the weekend and during major news?

Check it yourself

The free Bot Checker asks about drawdown and stop losses as part of its risk score. The Forex Bot Buyer's Guide covers how to find these numbers on a tracking page.

Educational content only, not financial advice. Trading forex involves substantial risk of loss.