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.
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
Common Mistakes to Avoid
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