What Is Maximum Drawdown?
Maximum drawdown (MDD) measures the worst loss from a peak to the subsequent trough in account equity (or strategy returns). If an account hits $100k, drops to $70k, then recovers, the MDD is 30%.
MDD is the most honest measure of strategy pain. A strategy returning 30%/year with 60% MDD requires emotional and financial capacity most retail traders don't have. A strategy returning 15%/year with 12% MDD may be much more practical to actually live with.
Backtests routinely understate real-world MDD because they exclude slippage, missed fills, and trader behavior during the worst drawdowns (when discipline tends to break). A safe rule: assume real MDD will be 1.5x what your backtest shows, and size positions accordingly.
Related terms
- Drawdown — The peak-to-trough decline in account equity during a losing streak.
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.
- Expectancy — The average profit or loss per trade, given win rate and average win/loss size.
- Risk Management — The systematic process of identifying and controlling exposure to losses.