📉 Drawdown Explained
Part of Complete Stock Market Learning Series
📌 What is Drawdown?
Drawdown is the percentage decline from the highest peak of your capital to the lowest point before a new high is made.
In simple terms: How much your portfolio falls from its highest value.
📊 Drawdown Formula
Drawdown (%) =
(Peak Value − Lowest Value) ÷ Peak Value × 100
- Peak Capital: ₹2,00,000
- Capital Falls To: ₹1,60,000
- Drawdown = 20%
📉 Why Drawdown is Important
- Shows real risk in your strategy
- Helps measure capital safety
- Indicates psychological pressure level
- High drawdown = Difficult recovery
Example: 20% loss needs 25% gain to recover. 50% loss needs 100% gain to recover.
📊 Animated Example (Equity Curve Drawdown)
Blue = Equity Growth | Red = Drawdown | Green = Recovery Phase
💡 Types of Drawdown
- Maximum Drawdown: Largest peak-to-trough decline
- Relative Drawdown: Percentage drop from peak
- Absolute Drawdown: Drop below initial capital
⚠ How to Reduce Drawdown
- Maintain proper Risk-Reward Ratio
- Never risk more than 1–2% per trade
- Avoid over-leverage
- Diversify portfolio
- Follow strict stop-loss discipline
⚖ Important Note
Professional traders focus more on controlling drawdown than maximizing profits. Capital protection ensures long-term survival in the market. This content is for educational purposes only.
🚀 Learn Professional Risk Control
Understand equity curve management, drawdown control, and capital protection strategies used by professional traders.
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