Maximum drawdown
Family III · Risk
Not to be confused with drawdown, forex drawdown, maximum leverage.
Maximum drawdown is the largest peak-to-trough decline recorded in an account or strategy over a defined period. It is calculated from the highest value reached before the decline and the lowest value reached afterwards, and is normally quoted as a percentage of that peak. It is a historical measure of the worst realised loss, not a forecast of future losses.
Calculation
Maximum drawdown is computed by tracking the running peak of the account value and measuring how far the value falls below that peak before it recovers. The formula is:
Maximum drawdown = (Trough value − Peak value) ÷ Peak value × 100
Only the single largest such decline over the period is reported as the maximum drawdown; smaller declines are ignored. The result is always zero or negative when expressed as a percentage change, though it is often quoted as a positive number.
Worked example
The account rose from 10,000 to a peak of 12,500, then fell to 9,000 before recovering. The decline from the peak is 3,500, which is 28% of 12,500. The earlier rise from 10,000 to 12,500 is not part of the drawdown.
Use and limitations
Maximum drawdown is used to compare the riskiness of strategies and to assess whether an account's worst historical loss is tolerable. It depends on the observation period: a longer track record will generally show a larger maximum drawdown than a shorter one. It is a backward-looking statistic and does not bound future losses. Brokers and regulators may impose different drawdown limits on particular account types, so the relevant threshold varies by jurisdiction and firm.
Often confused with
- drawdown
- A drawdown is any decline from a peak to a later trough, while maximum drawdown is specifically the largest such decline over the period measured; the visible sign is that drawdown can refer to many separate declines, whereas maximum drawdown names only the single worst one.
- forex drawdown
- Forex drawdown is the same peak-to-trough decline measured on a foreign-exchange account or strategy, whereas maximum drawdown is the general term applicable to any asset class; the visible sign is the presence of currency pairs or a base currency in the account description.
- maximum leverage
- Maximum leverage is the largest position size a broker permits relative to account equity, while maximum drawdown is a realised loss measured from a peak in account value; the visible sign is that leverage is expressed as a ratio such as 30:1, whereas drawdown is expressed as a percentage.