What Is Maximum Drawdown? Max Drawdown in Trading Explained

By Forex & Brokers DeskUpdated Nov 10, 2026

Definition

Maximum drawdown is the largest percentage decline in an investment, portfolio or trading account from a peak to the lowest point before a new peak is reached.

Key takeaways

MDD equals the trough value minus the peak value, divided by the peak value, times 100.
A running peak is used, so interim rebounds below the prior high do not reset the drawdown.
Recovery grows faster than losses: a 50% drawdown needs a 100% gain to return to the peak.
The Calmar ratio divides annualized return by the absolute maximum drawdown, often over 36 months.

Maximum drawdown (MDD) is the largest percentage decline in the value of an investment, portfolio or trading account from a peak to the lowest point that follows it, before the value climbs above that peak again. It answers one question about a track record: what was the worst loss someone would have suffered by buying at the top and holding to the bottom? Max drawdown is reported for strategies, funds and individual accounts. Proprietary trading firms also use the term for a hard loss limit, which follows the same peak-to-trough logic under the firm’s own rules.

What Is Maximum Drawdown?

A drawdown is any decline from a previous high. A portfolio worth $10,000 that falls to $9,500 is in a 5% drawdown, and it stays in that drawdown until it trades above $10,000 again. Over months or years a track record contains many drawdowns of different depths. The maximum drawdown is the deepest of them.

Because MDD is anchored to a prior peak rather than to the starting deposit, an account can show a large drawdown while still in profit. Suppose an account grows from $10,000 to $20,000 and then falls to $14,000. The holder is still up 40% on the deposit, yet the account has suffered a 30% drawdown, the loss someone who joined at the top would have experienced.

The Maximum Drawdown Formula

The basic drawdown formula is:

MDD = (Trough Value − Peak Value) ÷ Peak Value

The result is multiplied by 100 to express it as a percentage. Since the trough is always lower than or equal to the peak, the answer is negative (or zero). Many reports drop the minus sign and state the figure as a positive loss, for example “max drawdown 25%”. Both conventions mean the same thing, as long as you know which one a source uses.

For a full price series rather than a single peak and trough, the calculation is done point by point using a running peak, the highest value reached so far:

Drawdown at time t = (Value at t − Running peak at t) ÷ Running peak at t

MDD = the most negative drawdown across all points in the period

How to calculate max drawdown step by step

List the account or price values in time order (daily closes, end-of-day equity or trade-by-trade balances).
At each point, record the highest value reached up to and including that point. This is the running peak.
Compute the drawdown at each point as (value − running peak) ÷ running peak.
Take the most negative drawdown. That number is the maximum drawdown for the period.

Example of Maximum Drawdown

Hypothetical example. A portfolio starts at $500,000 and moves through these values:

Rises to $750,000
Falls to $400,000
Rebounds to $600,000
Falls to $350,000
Rises to $800,000

The maximum drawdown is:

($350,000 − $750,000) ÷ $750,000 = −53.33%

Several details explain why those two numbers are the ones used:

The peak is $750,000. The $600,000 rebound is an interim high, not a new one, so the running peak stays at $750,000.
The trough is $350,000, not $400,000. The first drop to $400,000 is a 46.67% drawdown, but the portfolio fell further before recovering. MDD uses the lowest value reached before a new high.
The $800,000 high ends the drawdown period. It does not enter the calculation. It only marks the point where the $750,000 peak was finally exceeded and a new drawdown period began.

Measured from the $600,000 interim high, the second decline would look like a 41.67% loss. Measuring from interim highs understates the damage, which is why the running peak matters.

The example also shows how hard deep drawdowns are to climb out of. From $350,000, the portfolio needed a gain of about 114% just to return to $750,000.

How Maximum Drawdown Works in Practice

Interpreting the number

A smaller maximum drawdown is better, all else equal. An MDD of zero means the value never fell below a previous high in the period; an MDD of −100% means the investment lost everything. A leveraged trading account can, in some circumstances, lose more than its equity, which is why brokers use the margin call mechanism to stop losses before that point.

The deeper the drawdown, the larger the gain needed to recover. The required gain is:

Recovery gain = Drawdown ÷ (1 − Drawdown), with the drawdown entered as a positive decimal.

Drawdown	Gain needed to return to the peak
10%	11.1%
20%	25.0%
30%	42.9%
50%	100.0%
75%	300.0%

The relationship is not linear. Moving from a 10% to a 20% drawdown raises the recovery requirement modestly; moving from 50% to 75% triples it. This asymmetry is why traders focus on drawdown control. Strategies that add to losing positions, such as the martingale strategy, can look stable for long stretches and then produce a very deep drawdown in one run of losses.

Context: the period matters

An MDD figure only means something alongside the period it covers and a relevant benchmark. Hypothetical example: a long-only U.S. equity fund launched in 2000 reports a maximum drawdown of −30% for the period ending 2010. On its own that looks severe, but the S&P 500 fell more than 55% from its October 2007 peak to its March 2009 trough. On drawdown alone, the fund held up much better than the market.

The reverse also applies. A short track record that has avoided a major sell-off may show a small MDD only because it has not yet been tested by a bad market. A longer history, or one that includes a known stress period, makes the figure more informative.

Why Is Maximum Drawdown Important?

Capital preservation. Investors care about not losing money they have already made. MDD puts a single number on the worst historical loss, which is easy to compare with what a person could tolerate financially and psychologically.

Comparing strategies. Two strategies can have the same average return, volatility and tracking error, yet very different maximum drawdowns. MDD separates systems that reached their returns smoothly from those that went through a deep hole on the way.

Risk-adjusted ratios. MDD is the denominator in several performance ratios:

Return over Maximum Drawdown (RoMaD): return for the period divided by the absolute maximum drawdown.
Calmar ratio: annualized return divided by the absolute maximum drawdown, traditionally calculated over the most recent 36 months.

Hypothetical example: Strategy A earns 12% a year with a 20% max drawdown, for a ratio of 0.6. Strategy B earns 9% a year with a 10% max drawdown, for a ratio of 0.9. B earns less but delivers more return per unit of worst-case loss. Whether B is the better choice depends on the investor’s goals, but the ratio makes the trade-off visible.

Sizing and risk limits. Traders use drawdown history to set position size and loss limits. If a backtest shows a 15% maximum drawdown at a given risk per trade, halving the risk per trade roughly scales the drawdown down too (assuming the same trades and no compounding effects). A position size calculator turns a chosen risk per trade into lot sizes, and stop-loss orders cap the loss on each position, though not the total drawdown from a run of losing trades. Funds set limits the same way, for example a review triggered if the portfolio falls a set percentage of net asset value (NAV) within a week.

Maximum Drawdown in Prop Firm and Account Rules

In proprietary trading and funded-account programs, “maximum drawdown” or “maximum overall drawdown” usually names a rule rather than a statistic: if the account falls to a certain level, it fails the evaluation or loses funding. The concept is the same, but the rule’s design changes where the limit sits. Each firm defines its own terms, so the details below are mechanics, not any firm’s policy.

Static drawdown is measured from the starting balance. Hypothetical: a $100,000 account with a 10% static limit has a floor of $90,000, no matter how high the account later climbs.
Trailing drawdown follows the account’s highest value, much like the running peak in the MDD formula. Hypothetical: with a 10% trailing limit on a $100,000 account that rises to $104,000, the floor moves up to $94,000. Some designs stop trailing once the floor reaches the starting balance.
Balance vs. equity basis. A balance-based limit counts only closed trades. An equity-based limit also counts open (floating) losses, so a position that dips deeply before recovering can breach the rule even if it closes in profit.
Daily vs. overall limits. A daily loss limit resets each trading day and is separate from the overall maximum drawdown. An account can breach either one independently.

Limitations of Maximum Drawdown

It ignores frequency. MDD records the single worst decline. A strategy with one 20% drawdown and a strategy with five separate 19% drawdowns can report almost the same figure.

It ignores duration and recovery. The number does not show how long the decline lasted, how long recovery took, or whether recovery happened at all. Analysts often track drawdown duration (time from peak to new peak) separately for this reason.

It is backward-looking. MDD describes the past path. A future drawdown can be deeper, especially if the history did not include severe market conditions. Return distributions with fat tails or negative skewness can produce losses larger than a short sample suggests.

It depends on the data. The same account can show different MDDs depending on whether you use daily closes, intraday lows or trade-by-trade balances. Closing prices miss intraday extremes, so an equity-based intraday measure is usually deeper than one built from end-of-day values.

It depends on the window. Extend or shorten the period and the maximum drawdown can change sharply, since one crash entering or leaving the window dominates the result.

It says nothing about returns. A strategy that barely trades will have a tiny drawdown and a tiny return, which is why MDD is read together with return, as in the Calmar ratio.

Drawdown vs. loss. A loss is measured against what you paid or deposited. A drawdown is measured against the highest value reached. An account can be in drawdown while still showing a net profit.

Maximum drawdown vs. volatility. Volatility (standard deviation) measures how widely returns vary in both directions. MDD measures only the deepest decline and reflects the order in which returns occurred, so two return series with identical volatility can have different drawdowns.

Drawdown vs. pullback. In market commentary, a pullback usually describes a short, modest price dip within a trend. Drawdown is a performance measure applied to an account or investment, whatever the size of the decline.

FAQs

What maximum drawdown is acceptable?

There is no universal threshold. It depends on the strategy's return, the length of the track record, the benchmark's drawdown over the same period and how much loss the investor can absorb, which is why comparing MDD with return, as the Calmar ratio does, is more useful than the drawdown figure alone. For a funded account, the acceptable drawdown is whatever the program's written limit allows.

The Bottom Line

Maximum drawdown matters to anyone comparing funds, testing a strategy or trading under prop firm loss limits. Read it alongside return, the period covered and a benchmark, since a short or calm history can make the figure look small. Check how a source or firm measures it, including static or trailing limits and balance or equity basis, before relying on the number.