What is Maximum Drawdown?
Maximum Drawdown (MDD) measures the largest peak-to-trough decline in a portfolio or asset's value over a given period. It is expressed as a percentage of the peak value. Maximum Drawdown is arguably the most psychologically important risk metric: understanding the worst-case loss a strategy has historically produced is critical for position sizing and investor suitability. A 50% drawdown requires a 100% gain just to break even. MDD is typically paired with the Calmar Ratio (annualised return ÷ MDD) to measure return per unit of drawdown risk. Investors must always ask: "Could I have held through this drawdown without panic-selling?"
Formula
MDD = (Trough Value − Peak Value) / Peak Value × 100%
Calmar Ratio = Annualised Return / |Maximum Drawdown|
Peak Value = highest portfolio value before the trough
Trough Value = lowest portfolio value after the peak before recovery
Calculator
How to Use
- 1Identify the peak: The highest portfolio value before a sustained decline.
- 2Identify the trough: The lowest value reached after the peak before a new high is made.
- 3Apply the formula: (Trough − Peak) / Peak × 100. The result is negative; express as absolute value for MDD.
- 4Calculate recovery required: To recover from a 30% drawdown, you need a 42.9% gain. Formula: 1/(1−MDD) − 1.
Worked Example
Example: Portfolio peak $100k, trough $65k
Peak
$100,000
Trough
$65,000
MDD = (65,000 − 100,000) / 100,000 = −35%. This portfolio lost 35% from peak to trough. Recovery required = 1/(1−0.35) − 1 = 53.8% gain from the trough just to break even, illustrating why limiting drawdowns matters more than maximising returns.