Maximum drawdown (max drawdown, MDD) is the largest fall in an account's equity from a peak to a later low, expressed as a percentage of that peak. It measures the worst loss an account or strategy actually went through before reaching a new high.
How it works: calculating max drawdown
- Build the equity curve: the account value after each trade or at each day's close.
- Track the running peak, the highest value reached so far.
- At every point, drawdown = (peak − equity) ÷ peak.
- The maximum drawdown is the largest of these values.
Two related measures matter as well: the drawdown in dollars, and the drawdown duration, the time from a peak until equity regains it. A curve built only from closed trades ignores the swings of open positions, so the drawdown felt in real time can be deeper than the one recorded.
How to read it: recovery maths
A loss is measured from a higher base than the gain that repairs it, so recovering takes a larger percentage: gain needed = drawdown ÷ (1 − drawdown).
| Drawdown | Gain needed to recover |
|---|---|
| −5% | +5.3% |
| −10% | +11.1% |
| −20% | +25.0% |
| −30% | +42.9% |
| −40% | +66.7% |
| −50% | +100% |
| −75% | +300% |
The curve steepens quickly: small drawdowns are repaired by ordinary results, large ones may take years or never be repaired at all.
There is no single drawdown figure that counts as "good". A trend-following system with a low win rate typically goes through deeper and longer drawdowns than a short-term system, and the same rules produce larger drawdowns at a higher risk per trade. A drawdown is best judged against the return earned over the same period, against the number of trades behind it, and against what you could follow without abandoning the plan. The worst drawdown in the record is also not a ceiling: a longer sample usually contains a deeper one.
Losing streaks and risk per trade
With fixed-fractional sizing, each loss is a share of the remaining equity, so a streak compounds: equity after n losses = (1 − risk)ⁿ. Ten full losses in a row:
| Risk per trade | Drawdown after 10 losses | Gain needed to recover |
|---|---|---|
| 0.5% | −4.9% | +5.1% |
| 1% | −9.6% | +10.6% |
| 2% | −18.3% | +22.4% |
| 3% | −26.3% | +35.6% |
| 5% | −40.1% | +67.0% |
Tripling the risk from 1% to 3% nearly triples the drawdown and more than triples the gain needed to recover. Such a streak is not far-fetched: at a 40% win rate with independent trades, the chance of at least one run of ten losses in 300 trades is about 52%, even if the rules have a positive expectancy. Choosing the risk per trade is covered in position sizing methods.
Risk of ruin is the probability that an account falls to a level at which trading has to stop, whether zero or a self-imposed limit such as a 50% loss. It depends on the expectancy, the spread of results, the risk per trade and where the ruin line is drawn. Two conclusions hold regardless of the exact model: with a negative expectancy, ruin becomes close to certain given enough trades, and with a positive expectancy the risk of ruin rises steeply as the risk per trade increases. Precise figures rest on assumptions, such as a stable win rate and independent trades, that real markets do not guarantee.
Worked example (illustrative numbers)
An account's equity at the end of each month: $100,000, $106,000, $112,000, $104,500, $95,200, $101,000, $110,500, $118,000, $111,000, $106,200, $113,000.
- First drawdown: from the $112,000 peak to $95,200, a fall of $16,800, or 15.0%. Returning to $112,000 required +17.6%.
- Second drawdown: from the $118,000 peak to $106,200, or 10.0%, not yet recovered at the end.
- Maximum drawdown: 15.0%, the larger of the two.
Drawdown rules and common mistakes
A trading plan often sets drawdown rules in advance, for example: halve the risk per trade after a 10% drawdown, stop and review after 15%, and return to full size only after a set number of trades that followed the plan. The thresholds are personal choices, not standards.
- Measuring from the starting balance instead of the highest peak, which understates the drawdown after a run of gains.
- Trusting a backtest's drawdown as the worst case; live trading adds costs, gaps and mistakes. See backtesting.
- Raising size to win it back, which deepens the drawdown if the streak continues.
- Judging rules by one drawdown without comparing it with what the expectancy and risk per trade imply.
In Clear Tape
The Clear Tape trade journal, free for every signed-in member, draws an equity curve from your account balance entries and the P&L of closed trades, and shows the maximum drawdown in dollars and as a percentage of the peak, alongside the longest losing streak (dashboard: Portfolio › My journal). Open positions are not included until they are closed. Backtests on the Systems page report the maximum drawdown with an equity curve against SPY buy and hold; they are available to Tools and Pro members.
Two free calculators apply this page’s maths to your own numbers: the drawdown recovery calculator gives the gain needed after any loss and the losing trades in a row that cause it, and the losing streak calculator gives the exact chance of a run of losses at a given win rate.
For educational purposes only. Not investment advice.