What is drawdown?
Drawdown is the decline from a peak equity value to a subsequent trough, before a new peak is established. If your account reaches $10,000 and then falls to $7,000 before recovering, your maximum drawdown was 30%.
Drawdown is expressed as a percentage and represents the worst-case loss an account experienced during a period — regardless of where it ended up.
Why drawdown matters more than return
A signal provider showing 80% annual return sounds compelling. The question you must ask: what was the maximum drawdown during that year?
- 80% return, 20% max drawdown: reasonable risk-adjusted performance
- 80% return, 80% max drawdown: to experience this return, you would have watched your account fall 80% at some point — and most people exit at the bottom, locking in the loss
The Sharpe ratio (return divided by volatility) and the Calmar ratio (annual return divided by max drawdown) are better performance measures than raw return, but these require the drawdown figure as an input.
Drawdown in copy trading
The most common beginner copy-trading mistake: selecting a signal provider based on YTD return without checking maximum drawdown.
If a PopularInvestor on eToro is up 60% for the year but had a 70% drawdown in month 3, any copier who joined in month 2 experienced the 70% decline — even though the annual figure looks positive. They likely exited at or near the trough, realising the loss.
Before copying any trader: check their maximum drawdown in the extended stats view. On eToro, this is not prominently displayed — you need to click through to the extended statistics tab. Any signal provider with a maximum drawdown above 30% should be considered high-risk.
Drawdown and stop-out
On a leveraged account, if your drawdown reaches the broker’s stop-out level (typically 50% of margin), the broker automatically closes your positions. This means a 50% drawdown on a leveraged position is not a paper loss — it is a forced close.
See also: Copy trading explained · Leverage explained · eToro review