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drawdown Metric

What Is Maximum Drawdown?

Maximum drawdown (MDD) is the largest peak-to-trough decline in portfolio or strategy value over a given period.

Quick Answer

Maximum drawdown (MDD) is the largest peak-to-trough decline in portfolio or strategy value over a given period.

What Does Max Drawdown Measure?

Maximum drawdown measures the worst cumulative loss from a prior high to a subsequent low. It is expressed as a percentage (e.g. -20%) and is one of the most intuitive risk metrics: it answers “how much could I have lost if I had been in this strategy from the start?” Traders and investors use it to size positions, set expectations, and compare the risk of different strategies or funds.

Formula:
Max Drawdown = (Trough Value - Peak Value) / Peak Value (expressed as %)

Typical range: Varies widely; 5–30% common for diversified strategies

How to Interpret Max Drawdown

  • 1A -20% max drawdown means the strategy was down 20% from a prior high at its worst
  • 2MDD is always negative or zero; often reported as absolute value (e.g. 20%)
  • 3Larger drawdowns usually require more time to recover psychologically and financially
  • 4Compare MDD with recovery time and return to assess “pain” of the strategy

How to Use Max Drawdown in Backtesting & Portfolio Analysis

✓Assess worst-case loss over the backtest or live period
✓Size positions and leverage based on acceptable drawdown
✓Compare strategy risk in a way clients and traders understand
✓Set stop-outs or risk limits in systematic trading

Common Mistakes to Avoid

✕Assuming past max drawdown is the worst you will ever see (tail risk)
✕Ignoring length of drawdown (time under water)
✕Comparing MDD across very different time periods or market regimes
✕Focusing only on MDD without recovery factor or return profile

Backtest with Max Drawdown in VaultCharts

VaultCharts includes backtesting with built-in and custom strategies. Analyze Max Drawdown, Sharpe ratio, max drawdown, and more—all with your data stored locally.

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