You're sleeping well. Your copy-traded account is up 40% for the year. Then the market crashes. Your account drops 45%. You panic. You sell everything at the bottom. You lock in the loss.
Your account was never down 45%—it was down 45% because you panicked and sold.
This is the story of Maximum Drawdown.
What Is Maximum Drawdown?
Maximum Drawdown is the largest peak-to-trough decline in account value.
In plain English: Imagine your account grows from $10,000 to $20,000. Then it crashes to $12,000 before recovering.
Your maximum drawdown is: ($20,000 - $12,000) / $20,000 = -40%
The Drawdown Score Guide
| Maximum Drawdown | Risk Level | Interpretation |
|---|---|---|
| -5% to -15% | Excellent | Trader manages risk exceptionally well. Comfortable to copy. |
| -15% to -30% | Good | Acceptable risk level. Most retail traders can handle this. |
| -30% to -50% | High Risk | Significant losses possible. Only if you have strong discipline. |
| -50% to -75% | Extreme Risk | Your account will be cut in half or worse. Most people panic here. |
| -75%+ | Dangerous | Catastrophic loss possible. Avoid unless you're professional. |
Why Drawdown Matters More Than Returns
The Panic-Selling Problem
Here's the brutal truth: Most people sell at the worst possible moment.
You copy a trader with +60% annual returns and -50% maximum drawdown. The trader's strategy works perfectly—they recovered from that -50% loss and continued earning.
But you didn't recover. When the account dropped 50%, you panicked and sold. You locked in the loss. The trader recovered without you.
This is the #1 reason copy traders fail.
Key Takeaways
- ✓Maximum Drawdown = worst loss from peak. It predicts panic moments.
- ✓Most people fail because they panic during drawdowns—not because returns are bad.
- ✓Find your emotional limit. Can you handle -20%? -30%? Be honest.
- ✓Combine with returns. High returns + high drawdown = risky. Moderate returns + low drawdown = safer.
- ✓Diversify to reduce drawdown. Copy multiple traders to smooth out losses.
Continue Learning
Sharpe Ratio Explained
Learn why Sharpe Ratio is the single best metric for identifying skilled traders. Real data + how to interpret scores like a pro.
The Psychology of Maximum Drawdown: Why You'll Panic (And How to Avoid It)
Understand the emotional impact of drawdowns and how to prepare yourself mentally.
The Trader Evaluation Checklist: 7 Red Flags That Separate Winners From Blowups
A systematic framework for evaluating traders before you risk your capital.
