Maximum Drawdown: Measuring Worst-Case Loss
Maximum drawdown is the largest peak-to-trough decline in your account, and it's the single best measure of the pain a strategy inflicts on the way to its returns.
Maximum Drawdown: Measuring Worst-Case Loss
Returns tell you how much you made. Maximum drawdown tells you whether you survived the trip.
Maximum drawdown (MDD) is the largest percentage drop from a peak in your account equity to the subsequent trough. It's the most honest measure of how bad things can get before they get better.
How it's calculated
Drawdown = (Peak value − Trough value) ÷ Peak value × 100
Maximum drawdown = the largest such drawdown over the period
Example: Account peaks at $10,000, falls to $7,000, then recovers to $12,000.
- Drawdown = ($10,000 − $7,000) ÷ $10,000 = 30%
- MDD = 30% (the recovery doesn't erase the drawdown — it already happened)
Why drawdown is more important than return
A strategy that returns 30% a year with a 50% maximum drawdown is, for most traders, untradable. The reason is the drawdown-recovery asymmetry:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 50% | 100% |
| 75% | 300% |
A 50% drawdown doesn't require a 50% gain to recover — it requires a 100% gain. The deeper the hole, the more brutally the math works against you.
What MDD reveals that win rate doesn't
- Win rate tells you how often you win
- Expectancy tells you if you're profitable on average
- MDD tells you whether you can stomach the strategy long enough to realize the average
A 60% win-rate system with a 45% MDD will be abandoned by most traders before the edge shows up. Psychology, not math, kills the strategy.
What's a "good" maximum drawdown?
| MDD range | Assessment |
|---|---|
| < 10% | Excellent, likely low-return |
| 10%–20% | Healthy for most discretionary traders |
| 20%–35% | Aggressive; needs strong psychology |
| > 35% | Danger zone for retail accounts |
For beginners, treat anything above 20% as a signal to reduce risk, not push through.
Reducing your drawdown
- Lower risk per trade — cutting risk from 2% to 1% cuts MDD roughly in half
- Diversify across uncorrelated setups — see the diversification logic below
- Use the position size calculator to size from a defined stop
- Cap daily and weekly loss limits — stops drawdowns from compounding emotionally
Tracking MDD in practice
- Log your account equity at the end of every session in a journal
- Mark the running peak and the current drawdown alongside it
- Review monthly: are you spending more time in drawdown than out of it?
A profitable trader isn't one with the highest returns. It's one whose drawdowns were small enough to survive.