Forex glossary
Drawdown
Documentation context: The MT5 report distinguishes balance, equity and growth modes; comparisons require the same measure and treatment of deposits and withdrawals.
A decline in a chosen capital measure from an earlier peak. Specify the measure, observation period and treatment of deposits and withdrawals when comparing drawdowns.
Illustrative example
How does it work in practice?
Suppose equity follows 10,000 → 11,000 → 9,900 USD with no cash flows. Drawdown is 1,100 USD, or 10% of the peak; the 1% loss from starting capital is a different measure.
Drawdown is measured from a peak
Three measures with different denominators
Model with no costs or cash flows: planned loss 100 USD, planned reward 200 USD; peak equity 12,000 USD, current equity 10,800 USD and margin 2,000 USD.
On a narrow screen, the table can be scrolled horizontally.
| Term | What it describes | Shared example |
|---|---|---|
| Risk-Reward Ratio | Compares a trade’s planned positive and negative outcomes. | Risk:reward 1:2; reward:risk 2:1. Neither guarantees a future result. |
| Drawdown | Compares current capital with an earlier peak in the same measure. | (12,000 − 10,800) / 12,000 = 10%. |
| Margin Level | Compares current equity with required collateral. | 10,800 / 2,000 × 100% = 540%. |
Takeaway: An account can have 10% drawdown and a 540% margin level simultaneously. A trade’s planned outcome ratio replaces neither measure.
Change an assumption, see the result
What changes if…?
Change the earlier peak and current value of the same capital measure. Compare drawdown with the percentage gain needed to recover the peak, without deposits or withdrawals.
Model of one capital series without deposits or withdrawals. Use either balance or equity consistently. A decline measured from the peak differs from the percentage gain needed to recover.
Check your understanding
Use the earlier peak as denominator and distinguish drawdown from return since the start.
Show the answer and explanation
10%.
(12,000 − 10,800) / 12,000 = 10%. Equity is simultaneously 8% above the original 10,000 USD.
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Related terms
Sources and documentation
- MetaTrader 5: Trading Report
The report distinguishes results before and after swaps and commissions and reports drawdown of the selected balance or equity measure from a local peak.
Document read:
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