How to Calculate Maximum Drawdown and Manage Drawdown in Forex Trading

Why You Should Worry About Drawdown

Everyone who enters the Forex market will face a “downtrend” in their account. A temporary loss is normal, but if you don’t know how to manage it, it can become a trap leading to huge losses.

The reason is: if an account of 10,000 THB loses 50%, it drops to 5,000 THB. You need a 100% profit to get back to the original amount because 5,000 × 2 = 10,000 only.

The bigger the loss, the harder you have to work to recover. That’s why maximum drawdown is crucial for long-term trading success.

What is Drawdown? An Easy-to-Understand Definition

Drawdown means: The amount of money the account decreases from its peak until it recovers

Simple example:

• Trader starts with 10,000 THB
• After several losses, the balance drops to 8,000 THB
• Then it recovers

Drawdown in this case = 2,000 THB (20% of total funds)

This data shows the true risk of your strategy:

• High Drawdown = high risk
• Low Drawdown = good money management and risk control

Types of Drawdown Traders Need to Know

1. Equity Drawdown — Real-time loss

This is when the “current” account balance drops because:

• Open trades are losing (unrealized loss)
• Closed trades have realized losses (realized loss)

Example: Trader has 10,000 THB. Currently, open trades reduce the account to 9,000 THB. The trades are still open; the “floating” loss is just that—floating.

Why is it important? Because it shows real-time psychological pressure. If you have a high Equity Drawdown, you’ll feel more anxious and may make poor decisions.

2. Historical Drawdown — Worst loss ever experienced

This looks back at the “maximum loss” the account has had in the past.

Formula: Highest account value - lowest account value = Historical Drawdown

Example:

• Highest account value: 15,000 THB
• Lowest account value: 10,000 THB
• Historical Drawdown = 5,000 THB

How to use? It tells you “how bad it has been” and helps you adjust your strategy for the future.

3. Relative Drawdown — Presented as a percentage

This shows the proportion of “loss as a percentage of the peak amount”

Formula: ((Peak amount - Trough amount() ÷ Peak amount × 100 = %

Example:

• Account grew from 10,000 to 20,000 THB
• Then fell to 15,000 THB
• Relative Drawdown = )(20,000 - 15,000) ÷ 20,000) × 100 = 25%

Benefit? It allows comparison between accounts of different sizes. When a trader says “20% drawdown,” you understand immediately.

( 4. Absolute Drawdown — Loss from the initial investment

This is the “direct” loss from the amount you initially deposited.

Formula: Initial deposit - lowest account value

Example:

• Deposit 10,000 THB
• Dropped to 8,000 THB
• Absolute Drawdown = 10,000 - 8,000 = 2,000 THB

Why need to know? It indicates how much effort is needed to recover. Smaller Absolute Drawdown makes recovery easier.

) 5. Floating Drawdown — Unrealized loss

This is when trades are open, and you are currently at a loss, but it may recover because the trade isn’t closed yet.

Example:

• Deposit 10,000 THB
• Open a sell position
• Now balance shows 9,000 THB
• Floating Drawdown = 1,000 THB ###but it can disappear if the price moves back###

Remember: Floating Drawdown can change at any moment, depending on market movements.

How to Think: A Table Comparing All 5 Types

How to Talk About Maximum Drawdown

Maximum Drawdown is the worst possible loss in a strategy, indicating the maximum risk.

When testing a new strategy, looking only at 30% profit isn’t enough. You should ask, “What is the worst drawdown?”

Simple rule:

• Drawdown < 10% = relatively safe
• Drawdown 10-20% = acceptable but cautious
• Drawdown > 20% = risky; need to adjust strategy

How to Manage Drawdown Reasonably

( 1. Set “Stop-Loss” Criteria in Advance

Decide: “If losses reach 10%, stop trading” and follow through.

This:

• Prevents continuous losses
• Gives time to rethink
• Stops emotional decision-making

) 2. Use Stop Loss on Every Trade

Stop Loss = Pre-set price; when hit, automatically close the trade

Example:

• Buy BTC at 40,000 THB
• Set Stop Loss at 39,000 THB
• If price drops to 39,000, it closes automatically, limiting loss to 1,000 THB

3. Risk Only 2% per Trade

The professional trader’s rule:

• Account 10,000 THB = risk 200 THB per trade
• Account 50,000 THB = risk 1,000 THB per trade

This prevents a single trade from “killing” your account.

4. Aim for Risk-Reward Ratio of 2:1 or higher

When entering a trade, set:

• Risk: 1,000 THB
• Reward: 2,000 THB or more

If the ratio isn’t good, skip it. If risking 1,000 THB only yields 500 THB, it’s not worth it.

5. Take Profits Regularly

If the account grows from 10,000 to 15,000 THB, withdraw 3,000-5,000 THB to “lock in profits.”

Then continue trading with the remaining funds. Even if you experience losses later, you’ve already secured some gains.

6. Avoid Revenge Trading###

This is “trading bigger after a loss to recover.”

Result: Further losses, bigger and bigger.

Why? Because it’s driven by emotion, not logic.

Solution: Stop for at least 1 hour, have a coffee, then come back to trade with a clear head.

Test Strategies Before Going Live

The best way: Use a demo account ###Demo Account( with virtual funds, e.g., 50,000 THB.

Benefits:

• No real money risk
• Truly test your strategy
• Measure the maximum drawdown of the real strategy
• Gradually switch to real trading once confident

Summary of Thinking About Drawdown

Drawdown is monitoring “how much money has decreased” from the “best point” until recovery.

5 Types:

1. Equity = real-time decrease
2. Historical = worst in history
3. Relative = percentage
4. Absolute = loss from initial deposit
5. Floating = unrealized loss

Management tips:

• Set stop-loss at )10% or higher(
• Always use Stop Loss
• Risk 2% per trade
• Aim for Risk-Reward 2:1 or better
• Withdraw profits periodically
• Avoid revenge trading

The more you understand drawdown, the calmer and more consistent your trading will become.