Maximum drawdown is the largest observed peak-to-trough decline in an equity or portfolio path over a stated measurement period. It describes the deepest loss from a previous high before a later observation, not simply the largest losing trade.
Calculate drawdown from the running peak
Let Peakt be the highest equity observed up to time t. A percentage drawdown at time t can be written as DDt = (Peakt − Equityt) ÷ Peakt.
Maximum Drawdown is the largest DDt in the selected sample. The same concept can be expressed in currency, but percentage drawdown is often easier to compare across capital levels.
A simple example
If an equity curve reaches $100,000 and then falls to $82,000 before establishing a new peak, that decline is 18%. If no other peak-to-trough decline in the sample is larger, the sample maximum drawdown is 18%.
Recovering from $82,000 to $100,000 requires a gain of about 21.95% from the trough because the recovery percentage is calculated on a smaller capital base.
Maximum drawdown is a path metric
Two strategies can have the same final return and the same average trade while experiencing different drawdowns because their wins and losses occur in a different order.
This makes drawdown relevant to capital durability and investor experience in a way that an endpoint return cannot capture.
Observation frequency changes the number
A drawdown calculated from end-of-day equity can miss a deeper intraday decline. Trade-close equity can differ again from mark-to-market account equity. State whether the series uses intraday, daily, trade-close or another observation convention.
Comparing maximum drawdowns from different observation rules can be misleading even when both calculations are correct.
The sample horizon matters
A longer history has more opportunity to contain a deep decline. Maximum drawdown from six months and maximum drawdown from ten years do not answer the same empirical question.
The observed maximum is not a ceiling. Future losses can exceed the historical maximum, particularly when volatility, leverage, liquidity or market structure changes.
Maximum drawdown is not the same as current drawdown
The broader Drawdown page owns the general concept, current drawdown and recovery logic. This page owns the worst historical peak-to-trough observation in a defined sample.
Do not confuse maximum drawdown with largest losing trade
A drawdown can be built by a sequence of moderate losses, transaction costs or mark-to-market declines. The largest single loss may be much smaller than the deepest cumulative equity decline.
Likewise, Maximum Adverse Excursion is an intratrade measure from entry while one position is open; it is not account-level maximum drawdown.
Read drawdown with return and exposure
A maximum drawdown number becomes more useful when paired with return, leverage, position-sizing policy, time to recovery and the market regime in which the decline occurred.
Use Risk Management to decide what drawdown is tolerable for the capital objective rather than copying a universal percentage.
Historical drawdown is evidence, not a guarantee
Maximum drawdown summarizes one observed path. It does not describe the full probability distribution of future losses, and it can be understated by short samples or favourable regimes.
The correct use of maximum drawdown is to understand how deep the observed equity path fell from a prior peak and to test whether the strategy and capital plan could survive comparable or worse conditions.