Performance Metric

Max Drawdown — Definition & Example

The largest peak-to-trough drawdown ever experienced by the account or strategy.

Max drawdown is the worst-case historical decline. It is a critical input for psychological capacity planning: if your strategy has a 30% historical max drawdown, you must be able to stomach 30% (or more) drawdowns going forward, because future drawdowns may exceed historical ones. Many traders quit during drawdowns smaller than their strategy's historical max because they hadn't planned for that pain.

Formula

Max Drawdown = max over all periods of (Peak Equity − Trough Equity) / Peak Equity

Example

Account ran from ₹1,00,000 to ₹1,20,000, dropped to ₹85,000, recovered to ₹1,30,000. Max drawdown was (1,20,000 − 85,000) / 1,20,000 = 29.2%.

Drawdown Recovery Factor Calmar Ratio Sharpe Ratio Panic Exit Revenge Trade Hope & Hold

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Max Drawdown — Definition & Example

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