Definition
Maximum Drawdown refers to the largest percentage decline in account value from a peak to a subsequent trough over a defined period. It is commonly used to measure downside risk and capital volatility.
Maximum drawdown helps evaluate how much a strategy or portfolio has declined before recovering to a new high.
Example in Context
If a trading account increases from $10,000 to $15,000 and later declines to $12,000 before recovering, the maximum drawdown during that period is based on the drop from $15,000 to $12,000.
FAQs
Does maximum drawdown predict future losses?
No. It measures historical declines and does not guarantee future performance.
Is a lower drawdown always better?
Lower historical drawdowns may indicate lower volatility, but overall risk and return should be evaluated together.
Can profitable strategies experience drawdowns?
Yes. Even profitable strategies may experience temporary declines.
Related Terms
- Risk Management
- Backtesting
- Return on Investment (ROI)
- Profit and Loss (PnL)
- Position Sizing