Max Drawdown
Risk Management
What it means
The largest peak-to-trough drop your account or strategy has ever experienced. It is the worst-case pain you would have lived through.
Example
A strategy that grew $10,000 to $15,000, then fell to $9,000 before recovering, has a max drawdown of $6,000 from the $15,000 peak -- a 40% max drawdown.
Mistake beginners make
Beginners look only at average returns and ignore max drawdown. A strategy that makes 30% a year but has a 60% max drawdown will likely be abandoned (or blown up) before the gains show.
Related terms
- Drawdown — The drop in your account value from its highest point to a later low. It measures how much…
- Risk of Ruin — The probability that a string of losses wipes out your account completely. Higher risk per…