A 20% drawdown doesn't mean the same thing when you measure it from your starting balance as when you measure it from your best equity high. They're two different numbers that answer two different questions, and mixing them up can make you read your own backtest with more fear, or less, than it deserves.
Absolute drawdown: measured from where you started
It's the gap between your starting balance and the lowest point your account reached at any time during the backtest. It answers a simple question: "How much of my starting capital did I lose at the worst moment?"
Relative drawdown: measured from your last high
It's the drop, as a percentage, from the highest peak your account reached before that drop, no matter what your starting balance was. It answers a different question: "How far did I fall after my best moment?"
The same backtest gives you two different drawdowns, depending on which of those two questions you ask.
See plansAn example with real numbers
You start with $50,000. Your equity climbs to a peak of $65,000, then falls back to $52,000 before it starts rising again.
| Type of drawdown | Calculation | Result |
|---|---|---|
| Absolute | Lowest point (52,000) vs. starting balance (50,000) | 0% (the account never dipped below its starting balance) |
| Relative | (52,000 − 65,000) / 65,000 | −20% (the real drop from the peak) |
Judged by absolute drawdown, this account looks healthy: it's still above where it started. Judged by relative drawdown, the same account just gave back a fifth of its best level. That's a 20% drawdown, and when you live through it in real time, it feels just as rough as any other 20% drop.
If you only watch absolute drawdown, a painful losing streak can still look like your account is in the green.
See plansHow it relates to a prop firm's trailing drawdown
If you've already read what changes when you move to a live or funded account, you'll recognize this: a challenge's trailing drawdown works exactly the same way. The limit moves up with your equity high instead of staying fixed at your starting balance. The difference is that, at a prop firm, it's a rule with real consequences (you fail the challenge). Here, it's simply a more complete way to read your own backtest results, before you ever get to that stage.
Which one to use, and when
- Use absolute drawdown if you're trading close to your starting balance and haven't built a profit cushion yet. It's the one that tells you whether your starting capital is actually at risk.
- Use relative drawdown once you're in profit. It's the closest match to how a losing streak feels after a good run, and the best preparation for prop firm rules if that's where you're headed.
To read both alongside the rest of your numbers, move on to the Ulcer Index, Sortino and Calmar ratios, which combine drawdown and returns into a single number.
Frequently asked questions
- Which drawdown should I look at first?
- Relative drawdown, in most cases. It tells you how much you can lose from your most recent high, which is exactly when you tend to keep opening trades. Absolute drawdown matters most when you're still trading close to your starting balance, before you've built up any profit cushion.
- Is relative drawdown the same as a prop firm's trailing drawdown?
- They work the same way: the limit moves up with your equity high. The difference is that a prop firm's trailing drawdown is a hard rule set by the firm, while relative drawdown is simply a way to read the equity curve of your own backtest.
- Why can my relative drawdown be bigger than my absolute drawdown?
- Because absolute drawdown only counts how far your account fell below your starting balance, while relative drawdown counts any drop from a peak. If your account rose and then pulled back without falling below where you started, absolute drawdown is 0% and relative drawdown isn't. That's exactly what happens in this article's example: 0% absolute, −20% relative.
- Which drawdown should I record in my backtesting journal?
- Both, if you can. They're easy to work out once you have the full equity curve, and each one warns you about a different risk: absolute drawdown about losing your starting capital, relative drawdown about giving up on a strategy right after your best run.
- Can relative drawdown change even if I don't lose money?
- It won't change while your equity stays flat, but it resets higher every time you reach a new peak. That's why, during a long winning streak, it's a tighter limit than absolute drawdown.
- Does Trade & Repeat tell relative and absolute drawdown apart?
- It calculates drawdown on your equity curve. Applying the distinction from this article (which point you measure from) is, for now, something you do yourself with that data.
Keep reading: How to read your backtesting statistics · From backtesting to a funded account: what really changes when you go live · Ulcer Index, Sortino and Calmar: the risk metrics your win rate won't show you
Educational content only; it is not financial advice. Trading financial markets involves the risk of losing capital.