Maximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
MDD = (Peak − Trough) / Peak × 100
Maximum drawdown (MDD) identifies the single worst losing period in a strategy's backtest or live track record. It answers: "What is the most painful stretch a trader using this strategy ever endured?"
A 50% max drawdown requires a 100% return just to recover — which is why keeping MDD low is as important as maximising returns. Traders and fund managers use MDD to size risk and set credible kill switches.
On the desk
A system's equity peaks at $50,000, falls to $30,000 (−40%), recovers to $55,000, then falls to $38,500 (−30%). The maximum drawdown is 40%, recorded on the first drop.