Maximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
Formula
MDD = (Peak − Trough) / Peak × 100
Maximum drawdown (MDD) identifies the single worst losing period in a strategy's backtest or live track record. It answers: "What is the most painful stretch a trader using this strategy ever endured?"
A 50% max drawdown requires a 100% return just to recover — which is why keeping MDD low is as important as maximising returns. Traders and fund managers use MDD to size risk and set credible kill switches.
Example
A system's equity peaks at $50,000, falls to $30,000 (−40%), recovers to $55,000, then falls to $38,500 (−30%). The maximum drawdown is 40%, recorded on the first drop.
Related Terms
Calmar Ratio
A risk-adjusted return measure dividing annualized return by maximum drawdown, rewarding strategies that grow without deep equity dips.
IntermediateConditional Value at Risk (CVaR)
The average loss in the worst-case tail beyond the VaR threshold; it answers how bad losses are when VaR is breached, not just how often.
AdvancedDrawdown
The peak-to-trough decline in account equity from a high point to the subsequent low before a new high is reached.
BeginnerEquity Curve
A chart plotting account balance over time across all trades, showing the overall trajectory and drawdown periods of a trading strategy.
BeginnerRisk Capital
Money explicitly set aside for speculation that the trader can afford to lose in its entirety without affecting their financial wellbeing.
BeginnerRisk of Ruin
The statistical probability that a trader will lose enough capital to be forced out of trading entirely, given their edge and risk per trade.
AdvancedSharpe Ratio
Return per unit of total risk — how much reward you earn for each unit of volatility taken. Higher is better.
IntermediateSortino Ratio
A Sharpe variant that divides excess return only by downside deviation, ignoring upside volatility as a "risk".
AdvancedTail Risk
The risk of rare, extreme outcomes in the far ends of a return distribution — events that standard models greatly underestimate.
Advanced