What is Max Drawdown?

What is Max Drawdown?

Max drawdown measures the largest peak-to-trough decline in equity before a new high is reached. It is the definitive snapshot of worst-case pain for a strategy over the measured period.

Why Max Drawdown Matters

• Realistic risk gauge: Average losses hide tail events; max drawdown shows how bad it can get.
• Capital requirements: You need at least twice the historical drawdown to survive similar stress.
• Investor communication: Allocators judge managers by how quickly they recover from deep pullbacks.

Working with Drawdown Data

• Track rolling equity highs in your performance dashboard to update max drawdown in real time.
• Backtest new strategies across crises to understand how max drawdown behaved historically.
• Scale down after a fresh equity high to avoid overconfidence right before the next decline.
• Plan recovery thresholds so you know when to reassess or retire the system.