How to read drawdown, and the difference between Equity DD and Balance DD

Drawdown (DD) is how much your account value falls from its previous peak. It tells you how much of your account you have to watch disappear along the way. The problem is that most reports give you several DD figures, and the easiest one to read may be the one that hides the most risk.

What are Balance and Equity?

Before reading DD, you need to tell these two apart.

• Balance is the money in your account, counting only closed trades
• Equity is Balance plus the profit or loss of trades still open. It’s what your account would be worth if you closed everything right now

With no open trades, the two are equal. But as soon as a trade floats in loss, Equity drops below Balance.

Example: one trade with zero Balance DD

Say you have 10,000 USD and open one trade with no Stop loss.

1. Price moves against you and the trade floats at −1,500 USD. At that moment Equity = 10,000 − 1,500 = 8,500
2. Later price comes back and you close the trade with a 100 USD profit. Balance = 10,100

Balance never went down, so Balance DD is 0%. But along the way your account lost 1,500 ÷ 10,000 = 15%. That 15% is the Equity DD, and it’s what actually happened to your money.

Balance DD only measures damage you’ve accepted. Equity DD measures the damage that really happened along the way.

Numbers from our tests

The gap between the two depends a lot on how you trade. Examples from our own gold backtests in MT5:

System	Balance DD	Equity DD
One entry per signal, no averaging, Stop loss on every trade (real tick data, Jan–Aug 2026)	2.43%	2.52%
Increases trade size 10× after a loss, 3,000 USD capital (2026)	220 USD (7%)	1,300 USD (43%)

The first system closes trades quickly. Wrong trades are cut before they float deep, so the two numbers are almost equal.

The second system differs by about 1,300 ÷ 220 ≈ 5.9 times. The enlarged trades after a loss usually win in the end, so Balance looks smooth. But before winning, those big trades floated so deep in loss that Equity lost almost half the account. If you looked only at the 7% Balance DD, you’d be badly misled.

Averaging-down, basket or grid systems behave the same way. Losses hide in trades that haven’t closed yet, until the day price doesn’t come back.

All of these are backtest results. They do not predict the future and are not returns you should expect.

The MT5 report has several DD fields

In the MT5 Strategy Tester report you’ll see both Balance Drawdown and Equity Drawdown, each split into three types.

Field	Meaning
Absolute	The furthest it fell below the starting capital
Maximal	The largest fall from a previous peak, in money
Relative	The largest fall from a previous peak, as a percentage

Here’s an example of why Maximal and Relative can differ.

• Early on, the account rises to 2,000 then falls 500, which is 500 ÷ 2,000 = 25%
• Later, the account rises to 10,000 then falls 1,000, which is 1,000 ÷ 10,000 = 10%

Maximal shows 1,000 (10%) because it’s the biggest drop in money. Relative shows 25% (500) because it’s the biggest drop as a percentage. The two come from different periods.

Absolute only looks at how far it went below the starting capital. If the account was in profit from day one and then fell hard later, Absolute could be zero even though it really hurt. So don’t rely on this one alone.

Use Equity DD to size your lots

A simple, widely used approach: decide first how far you’ll let the account fall, then work the lot size backwards.

A made-up example: 5,000 USD capital, maximum fall of 20%.

1. DD ceiling = 5,000 × 20% = 1,000 USD
2. Testing the system at 0.01 lot gives a maximum Equity DD of 300 USD
3. Maximum lot ≈ 0.01 × (1,000 ÷ 300) = 0.0333, rounded down to 0.03
4. At 0.03 lot, the tested DD is 300 × 3 = 900 USD, or 18% of capital

Step 3 works because when you multiply the lot size, the profit and loss in money grows by about the same multiple. But the worst DD in the past is not a ceiling for the future, so always leave some room.

If you size lots from the Balance DD of a system that holds losing trades, you could be trading several times bigger than your account can handle without realising it.

Common mistakes

• Seeing the Balance DD in a report and thinking the system is safe, when it holds losing trades or adds trades while losing
• Measuring DD from starting capital instead of from the previous peak
• Comparing the DD of two systems that use different lot sizes without adjusting them to the same size first
• Taking the DD from a short test period when the market was kind and treating it as the worst case