Drawdown in Forex Trading: Max Drawdown Explained

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Drawdown is the fall in an account from a peak to a subsequent low, usually shown as a percentage, measuring how much value has been lost from the high-water mark before recovery. For a UK trader it is the clearest gauge of risk, tying directly to the FCA’s 50% margin close-out rule.

How is drawdown measured?

Take an account that grows from £10,000 to £12,000, then falls to £9,000 before recovering. The drawdown is measured from the £12,000 peak to the £9,000 low, a fall of 25%. Maximum drawdown is the largest such peak-to-trough fall over a period, and it shows the worst stretch an account, or a strategy, has endured.

The recovery maths

Drawdown is unforgiving because recovery requires a larger percentage gain than the loss. A 25% drawdown needs a 33% gain to get back to the peak, and a 50% drawdown needs a 100% gain. This asymmetry is why controlling drawdown matters more than chasing returns, since deep losses compound the difficulty of recovery.

What is risk of ruin?

Risk of ruin is the chance that a run of losses ends the account before a strategy can recover. It depends on how much you risk per trade, not on the outcome of any single trade. Risk a small fraction each time and even a long losing streak leaves capital to trade with; risk a large fraction and a handful of losses in a row can halve the account. The table shows how many losing trades in a row it takes to lose half the account at a fixed risk per trade.

The figures come from compounding the loss: at 2% risk per trade, 0.98 multiplied by itself 34 times is close to 0.5. This is why most risk frameworks cap risk at 1% to 2% of the account per trade, because oversized position sizing turns an ordinary losing streak into a terminal one.

Drawdown and the FCA backstops

On a leveraged account, drawdown links to the FCA’s 50% margin close-out rule: when account equity falls to half the required margin, the broker starts closing positions. Negative balance protection then prevents a retail account falling below zero. These backstops cap catastrophic loss, but they activate only after a deep drawdown, so they are a floor, not a risk-management plan. They also vary in the fine print between providers, so compare best FCA-regulated forex brokers before relying on them as your safety net. Checking a provider’s negative balance protection and close-out terms against FCA-regulated broker reviews is worth doing before you need them, not after.

Common mistakes

Sizing positions for the upside while ignoring the drawdown they imply leads to accounts that cannot recover. Treating the close-out rule as a stop, rather than a last resort, leaves risk uncontrolled until it is too late. Reading return without drawdown flatters any strategy, which the stop-loss guide helps address. Testing drawdown control on a best demo account before going live catches an oversized strategy before it costs real money.