Level 3 · Lesson 4 / 4 · English
Drawdown, leverage and correlated exposure
3 min reading · Exercises take additional time
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Risk belongs to the whole account as well as each order. Drawdown measures decline from an equity peak, while leverage and shared currency exposure influence how rapidly adverse moves can affect equity. Several separate tickets can still represent one concentrated economic risk.
What you will learn
- Explain drawdown, leverage and correlated exposure.
- Work through the stated hypothetical example with explicit units.
- Recognise limitations and apply a documented practice check.
Understand drawdown and recovery
From a hypothetical equity peak of USD 1,000 to USD 800, drawdown is 200 divided by 1,000, or 20%. Returning from USD 800 to USD 1,000 requires a USD 200 gain relative to the smaller base: 200 divided by 800 equals 25%. Equal percentage losses and gains do not cancel because their bases differ.
A recovery plan should not require a larger volume or a deadline to earn the money back. Review whether the method, costs and execution remain valid, and whether the account exposure is affordable. Reducing or pausing activity can be a legitimate response. Drawdown thresholds are personal planning decisions, not broker protection guarantees.
Measure shared exposure and margin sensitivity
A long EUR/USD position and a long GBP/USD position both include short-USD exposure. Their returns are not perfectly correlated, but a USD-related shock can affect both. Historical correlation is sample-dependent and can change. Adding their planned stop losses gives a simple scenario estimate, not a full stress model.
Notional exposure divided by equity gives a simplified effective leverage measure. USD 10,000 notional against USD 1,000 equity is 10 times. A 1% adverse movement on the entire USD 10,000 exposure is approximately USD 100 before costs, or 10% of the initial equity. Margin required at the provider’s ratio is distinct from this economic sensitivity.
Key terms
- Drawdown
- Percentage decline from a defined equity peak.
- Effective leverage
- Notional exposure divided by equity under stated valuation assumptions.
- Correlation
- Sample-dependent co-movement, not a guarantee of diversification.
Hypothetical worked example · Not live market prices
Drawdown and recovery
- Peak equity is USD 1,000 and current equity is USD 800.
- Drawdown = (1,000 − 800) ÷ 1,000 × 100 = 20%.
- Required recovery = (1,000 − 800) ÷ 800 × 100 = 25%, before further costs.
| Measure | Base | Percent |
|---|---|---|
| Drawdown | 1,000 | 20% |
| Recovery | 800 | 25% |
Simplified educational calculations. Costs, slippage and provider-specific adjustments apply where relevant; these are not actual returns.
Common mistakes to avoid
- Using the original equity base for recovery; use the lower current equity.
- Calling different pair names independent risks; inspect shared currencies.
- Using margin as effective leverage; compare notional exposure with equity.
Lesson summary
Account-level risk includes nonlinear recovery needs, shared exposures and full notional sensitivity. Separate provider margin rules from an affordable risk plan.
Practical exercise
An account falls from USD 2,000 to USD 1,500. Verify 25% drawdown and a 33.33% recovery requirement. Then list the shared USD exposure in long EUR/USD and long GBP/USD and describe an adverse common scenario.
Knowledge check
Check your understanding
Results apply to this attempt only and are not saved to a student account. No certificate is issued.
Answer all questions correctly and complete the exercise. Progress follows you between Academy pages for this visit only; it is not saved to an account and resets on reload.
Related lessons
Financial education, not personal investment advice. Leveraged Forex and CFDs can lead to substantial losses. Demo practice and correct quiz answers do not guarantee trading success.