Max drawdown

Max drawdown (MDD) measures the worst observed loss from a portfolio peak to a subsequent trough before a new peak is reached: MDD = max over t of (peak(t) - value(t)) / peak(t). It captures the pain a real trader would have felt holding through the worst stretch.

Example. A strategy starts at $80, runs up to $120 (the peak), then falls to $60 before recovering. MDD = ($120 - $60) / $120 = 50%. Even if the strategy ends higher, it tells you that at some point you would have been down half your equity — a sobering risk signal.

MDD is best read alongside the Sharpe ratio: a high Sharpe with a deep drawdown usually means returns are skewed or the sample is short. CAGR/MDD is a simple alternative risk-adjusted metric when you want to reward recovery speed.

Use the Max drawdown calculator to compute MDD from your own equity-curve data. Research output only — this is not investment advice.