Drawdown is one of the most important — and most misunderstood — concepts in trading. Many beginners panic the moment they see their account balance drop, thinking something has gone wrong. In reality, drawdowns are a normal and unavoidable part of every profitable trading strategy.
This guide explains what drawdown is, why it occurs, how to calculate it, and most importantly — how to handle it professionally.
What Is Drawdown?
Drawdown is the decline in your account equity from its highest peak (All-Time High) to the lowest point before a new high is made.
It is always measured as a percentage from the peak.
Simple Single-Asset Example
- You start with $10,000
- The position grows to $15,000 (new peak)
- Then the price reverses and your equity drops to $12,000
Drawdown calculation:
- Peak = $15,000
- Trough = $12,000
- Drawdown = ($15,000 - $12,000) / $15,000 = 20%
Drawdown on Portfolio Level
When running multiple assets or strategies, always track portfolio drawdown.
Portfolio Drawdown Example
Portfolio size: $50,000
| Asset | Current Value | Peak Value | Individual Drawdown |
|---|---|---|---|
| BTC | $12,000 | $14,000 | 14.3% |
| TAO | $8,500 | $11,000 | 22.7% |
| PEPE | $4,200 | $7,000 | 40% |
| ETH | $15,000 | $15,000 | 0% |
| WLD | $6,800 | $8,500 | 20% |
Portfolio total:
- Current equity = $46,500
- Previous peak = $55,500
- Portfolio Drawdown = 16.2%
Diversification significantly reduces the overall portfolio drawdown compared to individual assets.
Why Drawdowns Happen
Markets constantly change regimes. No strategy performs well in all conditions. Drawdowns are the natural result of this mismatch.
If the Algorithm Is Proven — Drawdown Is Normal
This is a very important point:
If your algorithm is properly backtested, forward-tested, and has shown positive expectancy over time, then experiencing a drawdown is completely normal and even expected.
A proven system doesn’t suddenly stop working — it simply entered a phase where market conditions are not favorable for it right now.
Think of it like this:
Imagine you’ve wanted to buy a high-quality watch for a long time. You’ve researched it, you know its real value, and you believe it’s worth the price. One day you see it on sale with a 25% discount.
Would you panic and say “this watch is broken”?
Or would you see it as a great opportunity to buy more at a better price?
Drawdown in a proven algorithmic system is exactly the same — the “asset” (your strategy) is temporarily cheaper. If you trust the system long-term, a drawdown is not a problem — it’s a test of your discipline and an opportunity to let the system recover and compound.
What Makes a Strategy Strong
A great strategy:
- Has positive expectancy over hundreds of trades
- Keeps maximum drawdown within acceptable limits (15–35%)
- Recovers from drawdowns
- Works well when combined with other strategies
The Biggest Trader Mistake During Drawdowns
Most beginners:
- Turn off the strategy during drawdown
- Switch systems right before recovery
- Increase risk to “catch up”
Professionals do the opposite: they stay calm, trust the tested system, and often even increase allocation slightly if risk rules allow.
How to Properly Manage Drawdowns
1. Accept Drawdowns as Normal
Especially with a proven algorithm — drawdowns are not danger, they are part of the cycle.
2. Set Clear Risk Rules Before You Start
- Risk per trade: 0.5–1%
- Max portfolio drawdown: 15–25% (with auto-pause)
- Daily/weekly loss limits
3. Use Strong Diversification
Combine different assets and strategies so that when one draws down, others can offset the loss.
4. Judge Performance in Cycles
Evaluate results over 3–6 months, not day-to-day or week-to-week.
5. See Drawdowns as Opportunities
If the system is proven, a drawdown is the moment when future profits are being “built” at a discount.
How Radiant AI Handles Drawdowns
Radiant AI is built to survive and recover from drawdowns effectively:
- Automatic diversification across multiple algorithms
- Dynamic risk reduction during unfavorable regimes
- Pre-set drawdown limits and auto-pause
- Full transparency of current and maximum drawdown
Explore the risk management system: https://getradiant.tech/how-it-works
See balanced portfolios: https://getradiant.tech/portfolios
Watch live performance: https://getradiant.tech/live-crypto-trading
Final Thoughts
Drawdowns are not failures — they are a necessary phase in every profitable journey.
If your algorithm is properly tested and has proven mathematical expectancy, then a drawdown is normal, healthy, and often the precursor to the next strong growth period.
Key mindset shift:
- Stop fearing drawdowns.
- Start respecting them as the price you pay for long-term profits.
- Treat them like a sale on something you already believe in.
The traders and systems that survive drawdowns with discipline are the ones that achieve outstanding results over time.
FAQ
What is a drawdown in trading?
A drawdown is the percentage decline in account equity from its highest peak to a later low.
Is drawdown bad if I have a proven algorithm?
No. For a tested and profitable system, drawdown is normal and expected. It does not mean the algorithm stopped working.
What is an acceptable drawdown?
Conservative: 10–20%
Balanced: 20–30%
Aggressive: up to 35–45%
Can you avoid drawdowns completely?
No — even the best systems experience them.
Why do many traders fail during drawdowns?
They panic and make emotional decisions instead of trusting their tested system.
How should I react to a drawdown?
Stay disciplined, review your risk rules, and remember: if the strategy is proven, this is often the best time to let it work.
Ready to build a system that treats drawdowns as normal?
Check algorithms: https://getradiant.tech/algorithms
Browse portfolios: https://getradiant.tech/portfolios
About Radiant
Radiant is an automated crypto and tokenized-stocks trading platform — verified live performance, transparent equity curves, and managed portfolios.
Mentioned tickers: DRAWDOWN · TRADING · VOLATILITY · MOMENTUM
Originally published at getradiant.tech/updates/what-is-drawdown-in-trading-and-how-structured-trading-helps-manage-it. Not financial advice.
