Track each new peak
Begin with initial equity and process trades in their actual sequence. After each result, compare new equity with the previous maximum. The difference from that peak is current absolute drawdown; the largest difference is maximum drawdown.
Our example begins at USD 10,000, reaches USD 10,285 after trade three and later ends at USD 10,110. The largest decline is USD 175, or approximately 1.70 percent of the corresponding peak. The overall series is still positive.
Closed trades versus intratrade risk
Our example uses closed trades after costs. It excludes unrealized losses between closes. A broker or prop firm may instead use equity including open positions or a particular trailing rule. These definitions are not interchangeable.
Account for deposits and withdrawals
A withdrawal is not a trading loss. Adjust the equity series for external cash flows or use a properly defined return series. Document the period and cost basis. A small historical drawdown does not cap potential future losses.
Drawdown(t) = running equity peak − current equity(t)
A reproducible example
| Measure | Before costs | After costs |
|---|---|---|
| Sum of winning trades (USD) | 550.00 | 530.00 |
| Absolute sum of losing trades (USD) | 400.00 | 420.00 |
| Balance: wins minus losses (USD) | 150.00 | 110.00 |
| Profit Factor | 1.375 | 1.262 |
USD 550 in wins − USD 400 in losses = USD 150 balance before costs. After 8 × USD 5 in costs, USD 110 remains. Net profit factor first deducts costs from each trade: 530 / 420 ≈ 1.262.
- Balance before costs
- 150.00 USD
- Total costs
- 40.00 USD
- Balance after costs
- 110.00 USD
- Profit factor after costs
- 1.26
- Expectancy per trade
- 13.75 USD
- Max. drawdown
- 175.00 USD
Equity after closed trades; synthetic starting equity: USD 10,000.
| Trade | Equity (USD) | Drawdown (USD) |
|---|---|---|
| 0 | 10,000.00 | 0.00 |
| 1 | 10,145.00 | 0.00 |
| 2 | 10,040.00 | 105.00 |
| 3 | 10,285.00 | 0.00 |
| 4 | 10,130.00 | 155.00 |
| 5 | 10,175.00 | 110.00 |
| 6 | 10,120.00 | 165.00 |
| 7 | 10,215.00 | 70.00 |
| 8 | 10,110.00 | 175.00 |