What is max drawdown?

1. The account grows from $10,000 to $12,000, falls to $9,000, then recovers to $13,000.
2. The deepest fall is from the $12,000 peak to the $9,000 low: (9,000 − 12,000) ÷ 12,000 = −25%.
3. Max drawdown is −25%, even though the account ended the period up 30%.

• It shows the worst stretch. Max drawdown tells you how much pain a strategy put you through, which a return figure hides.
• Losses compound. A 25% loss needs a 33.3% gain to get back to even. A 50% loss needs 100%.
• It tests your nerve. A strategy is only useful if you can keep following it through its drawdowns.

Related terms

• Net Return →Net return is the total percentage gain or loss of a strategy or investment over a period, measured from its starting value to its ending value.
• Backtesting →Backtesting is testing a trading strategy's rules on historical market data to estimate how the strategy would have performed in the past.
• Trailing Stop →A trailing stop is an exit that follows price at a set distance as a trade moves in your favour, and closes the trade if price reverses by that distance.