Maximum Drawdown

The largest fall from any peak to a later trough in a price or value series, as a fraction of that peak. It measures the worst loss an investor who bought at the top and sold at the bottom would have suffered.

When to use: Use to judge the pain of holding an investment, which volatility alone does not capture, and to size positions so that a repeat of the worst drawdown would be survivable.

Calculator

Formula

\text{MDD} = \max_{t} \frac{\max_{s \le t} P_s - P_t}{\max_{s \le t} P_s}

Variables

Symbol	Name	Description	Unit
MDD	Maximum Drawdown	Largest peak-to-trough decline as a fraction	%
Prices	Price Series	Prices or portfolio values in time order	$

Real-Life Examples

Example 1: Recovering Stock

Month-end prices: 100, 110, 105, 120, 95, 100, 130, 110, 125.

Given

Prices = [100, 110, 105, 120, 95, 100, 130, 110, 125]

Step-by-Step

1.Running peak reaches 120, then price falls to 95: drawdown = (120 − 95) / 120 = 20.83%

2.Later peak 130 falls to 110: drawdown = 15.38%, smaller

3.MDD = 20.8333%

Result:20.8333%

Someone who bought at 120 watched a fifth of their money disappear before the recovery, even though the series ends 25% above where it began.

Example 2: Choppy Decline

Prices: 50, 48, 52, 40, 45, 38, 55.

Given

Prices = [50, 48, 52, 40, 45, 38, 55]

Step-by-Step

1.Running peak 52, then price falls to 40 and later 38: drawdown = (52 − 38) / 52 = 26.92%

2.MDD = 26.9231%

Result:26.9231%

The trough at 38 is measured against the peak of 52, not the start of 50. Drawdown always uses the highest point seen so far.

Frequently Asked Questions

No. If the last price is the lowest point after a peak, that is the maximum drawdown so far; it may still deepen.

Volatility treats gains and losses alike and says nothing about sequence. Drawdown captures a specific, ordered sequence of losses, which is what investors actually experience.

Related Formulas

Historical Value at Risk (VaR)

Sortino Ratio

Holding Period Return (HPR)

Parametric Value at Risk (VaR)Three-Asset Portfolio Variance