Maximum Drawdown
Risk Management
Maximum drawdown is the largest peak-to-trough loss an account or strategy has experienced, used to assess worst-case risk and staying power.
What is maximum drawdown?
Maximum drawdown is the single largest drawdown — the deepest peak-to- trough decline — that an account or trading strategy has ever recorded over a given period. While ordinary drawdown describes the current or a recent dip, maximum drawdown is a historical worst-case figure: the biggest hole the equity curve has ever fallen into before eventually recovering.
It’s one of the standard statistics used to describe a strategy’s risk, often quoted alongside average return, win rate, and the risk-reward ratio of its trades.
A worked example
Imagine a strategy backtested over five years shows several drawdowns along the way: 8%, 15%, 22%, and 11%. The maximum drawdown for that strategy is 22% — the deepest of all the declines recorded, regardless of when it happened or how quickly the account recovered afterward.
A trader deciding whether to run this strategy live has to ask a practical question: could they psychologically and financially tolerate watching the account fall 22% from a peak, knowing the historical data says it happened before and could happen again? If not, the position sizing or strategy itself may need adjusting before going live.
Why it matters
Maximum drawdown is a sobering reality check that pure return figures can hide. A strategy that returned 40% a year might look attractive until its maximum drawdown reveals it also lost 35% of the account at one point along the way — a swing many traders would abandon the strategy over before it recovered. Comparing maximum drawdown across strategies, or before committing real capital based on a backtest, is a key part of sound risk management and realistic expectation-setting.
Quick recap
- Maximum drawdown is the deepest peak-to-trough decline a strategy or account has ever recorded.
- It is usually derived from historical results or backtesting, not a single recent dip.
- It reveals the worst-case pain a strategy has actually produced, which raw returns alone don’t show.
- Comparing maximum drawdown alongside returns gives a fuller risk picture before committing capital.
Trading forex and CFDs carries a high level of risk and may not be suitable for all investors. Past performance is not indicative of future results.