Question 1

What is maximum drawdown?

Accepted Answer

Maximum drawdown (MDD) is the largest peak-to-trough decline in account value over a given period. If your account went from $10,000 to $6,000, that is a 40% maximum drawdown. It measures the worst-case loss a strategy has historically experienced.

Question 2

Why does recovery require more than the drawdown percentage?

Accepted Answer

Because you are starting from a lower base. A 50% loss from $10,000 leaves you with $5,000. To return to $10,000 from $5,000 requires a 100% gain — twice the original loss percentage. This asymmetry is why large drawdowns are so damaging.

Question 3

What is an acceptable maximum drawdown?

Accepted Answer

Many professional funds target less than 20% maximum drawdown. Retail traders often experience 30–50%. The critical factor is not just the drawdown size but how long recovery takes — a 20% drawdown that takes 2 years to recover is psychologically and financially costly.

Question 4

How does position sizing affect drawdown?

Accepted Answer

Drawdown scales directly with risk per trade. Halving your risk per trade roughly halves your maximum drawdown in a losing streak. This is the most direct lever a trader has to control drawdown without changing strategy.

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