# Maximum drawdown

> Maximum drawdown is the largest percentage decline from an equity peak to a subsequent trough before a new peak is set. It measures the worst loss a strategy has actually inflicted, not the loss it might inflict, and it is asymmetric: recovering a 50% drawdown requires a 100% gain, which is why drawdown control matters more to compounding than peak return does.

Canonical HTML page: https://qanterion.com/glossary/max-drawdown
Updated: 2026-08-18
Also known as: MDD, peak-to-trough decline

## How it is calculated

```
Drawdown(t)  = (Peak equity up to t − Equity(t)) ÷ Peak equity up to t
Max drawdown = max over all t of Drawdown(t)

Recovery required = 1 ÷ (1 − Max drawdown) − 1
```

## Worked example

Equity peaks at $100,000 and falls to $70,000 → 30% max drawdown, requiring a 42.9% gain to recover.

## Why it is the constraint, not the statistic

Return is what a strategy produces; drawdown is what a person has to sit through to receive it. Almost every abandoned strategy was abandoned inside a drawdown that the backtest showed and the trader had not internalised. Sizing decisions are therefore made against drawdown tolerance, not against expected return — a strategy that cannot be held is worth zero regardless of its average.

## Depth is only half of it

Two strategies with identical 30% maximum drawdowns are not equally survivable if one recovers in six weeks and the other takes two years. Drawdown duration — time under water — is what determines whether capital is available for other opportunities and whether the operator keeps going. Report both, or the number is incomplete.

## How it gets misread

Backtested maximum drawdown is routinely treated as a worst case. It is the worst case in the sample, which is a lower bound: the future contains regimes the sample did not. Live drawdowns exceeding the backtested maximum are normal, not evidence of a broken strategy.

## Calculate it

- Sharpe ratio calculator: https://qanterion.com/tools/sharpe-ratio-calculator
- Risk of Ruin Calculator: https://qanterion.com/tools/risk-of-ruin-calculator

## See also

- Risk of ruin: https://qanterion.com/glossary/risk-of-ruin
- Position sizing: https://qanterion.com/glossary/position-sizing
- Sharpe ratio: https://qanterion.com/glossary/sharpe-ratio

## Sources

- [On the Maximum Drawdown of a Brownian Motion](https://www.cs.rpi.edu/~magdon/ps/journal/drawdown_journal.pdf) — Journal of Applied Probability (author copy, Rensselaer Polytechnic Institute)
- [Drawdown: From Practice to Theory and Back Again](https://arxiv.org/abs/1404.7493) — arXiv (Goldberg & Mahmoud; published in Mathematics and Financial Economics)
- [Drawdown Measure in Portfolio Optimization](https://www.math.columbia.edu/~chekhlov/ChekhlovUryasevZabarankin--03-2004.pdf) — International Journal of Theoretical and Applied Finance (author copy, Columbia University)

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## Risk notice

Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.