The equity curve is an important trading basic to understand. An equity curve is simply a graph of your account balance over time. It is the sum of all of your profits and losses. Below are a few examples.

The example above is for the purposes of illustration only. We started with a $10,000 opening account balance. What we want to see in any account is growth.An account is growing in equity when the equity curve moves from the lower left-hand corner to the upper right-hand corner.
The above equity curve is not a realistic equity curve.This is the type of equity curve that pops up in the dreams of traders and investors.In reality, we don’t have to have perfect trading method to be profitable over the long term.

There are two different types of equity.The first type of equity is known is closed trade equity. As the name might suggest closed trade equity is the equity of all trades that are closed and does not include the current profit or loss of any open trades.The second equity i known as open trade equity. Open trade equity includes close trade equity plus any profit or loss of any current open trades.

The equity curve above is different than the first one in that it illustrates the result of our first 3 trades being losing trades. The lowest point of the equity curve can be seen at the arrow. Our equity at this point is $7000 which is $3000 less than our starting account equity of $10,000. At this point in time the largest dollar amount of a dip in our equity has been $3000. The largest dip in equity from an equity peak to an equity valley is known as the, "Maximum drawdown". In the above example the current maximum drawdown is -$3000.

We’ve added an trade to the above equity curve and that is a losing trade in the amount of -$2000.The arrow above is pointing at an, "equity peak". Immediately after the equity peak is when we have our $2000 losing trade. As you can see our equity then moves higher leaving us with an, "equity valley” with a depth of -$2000. This $2000 valley also represents a, "Drawdown". As this $2000 drawdown is smaller than our previous drawdown of $3000, It is to be referred to as a drawdown and not the maximum drawdown. Currently our maximum drawdown is -$3000.

Please keep in mind that the equity curve shown are just simple example. Also keep in mind that the number of trades shown was intentionally kept small to keep things simple. Every equity curve traded in real-time will have peaks and valleys. A good trading system will recover from its drawdowns and continue on to make new equity highs.