Maximum Drawdown Calculator
What is Maximum Drawdown?
Maximum drawdown (MDD) - this is the biggest loss from peak to minimum in your account balance or equity curve over a period. Imagine your account grew from $10 000 to $15 000, then dropped to $12 000 - that's a $3 000 drawdown (20% from the peak). I learned the hard way from real trading: this metric is critical for traders, it shows the worst loss you're mentally and financially preparing for.
It's not about single losses, but the buildup from a string of bad trades and rough stretches. A strategy with just a 5% win rate can hit you with 35% drawdown if the losses stack up. That's why you need to know the difference:
- Position sizing: A 20% drawdown breaking you? Don't go all-in on risks.
- Strategy evaluation: +15% with 40% risk beats +12% with 15%? Not really.
- Risk management: From history's worst, set your stops right so you don't wipe out the account.
How the Calculator Works
- Input your starting capital and balance sequence (end-of-day, after trades, or snapshots).
- It tracks the peak and compares each new balance, calculating the percentage drop.
- The longest and deepest drop from high to low - that's your maximum drawdown.
- Plus start dates, recovery (if any), and exact percentage from peak to bottom.
What to Do in Practice
- Keep records at fixed intervals (daily, weekly, per trade) - that'll show real risks clearly.
- Test it with fake money first: you'll see how the worst loss hits your nerves.
- Adjust positions and stops so future drawdowns stay under your limit.
- Mix it with Sharpe or Sortino - get the full picture on volatility and overall risk.
Real Cases
Case 1: Conservative Forex Swinger
Start: $50 000. Peak: $54 250 (+8.5%). A GBP/USD streak tanked it to $47 880. Drawdown: $6 370 (11.7%). Recovery took 32 days. The guy realized: 2% per trade was too aggressive, cut it to 1%. Calculator confirmed - now drawdowns under 5%. Saved his sanity for real.
Case 2: Aggressive Day Trader
Start: $100 000. Peak: $127 500 (+27.5% over 6 months). Earnings season dropped it to $89 200. Drawdown: $38 300 (30%). Recovery: 61 days. He showed investors: risks managed, 30% is normal, but took a 2-week break to reset. Still trading strong.
Case 3: Long-Short Stock Fund
Start: $10 000 000. Peak NAV: $11 200 000. Crash hit longs, shorts gained +$420 000. Drawdown: $580 000 (5.2%). Hedging cut it 65% vs long-only (14%+). In marketing: hedge justifies the 0.75% fee. Proven.
Case 4: Crypto Newbie
Start: $5 000. Peak: $8 750 (+75% over 3 months). FOMO before correction down to $3 120. Drawdown: $5 630 (64.3%). Tough lesson on leverage and concentration. With cash management: 5 positions at 2% risk each - max drawdown 12%. Learn from others' pain.
Case 5: Options Seller Pro
Start: $250 000. Peak: $267 500 (+7%). Volatility tested short calls - down to $221 875. Drawdown: $45 625 (17%). Normal for the style. Backtest: wider spreads drop drawdown to 9%, but profits -30%. Chose 17% for risk/reward balance.
What Affects the Results
- A big loss upfront spikes the drawdown - but returning to the old peak resets it, even without profit.
- Different timeframe (intraday/week) shifts the peak and recalculates.
- Drop outliers (errors) - drawdown for investors drops big time.
Common Mistakes
Mistake 1: Forgetting Recovery Time
Depth without recovery time - incomplete picture. 20% over 5 days is easier than 90. A long bounce hints at strategy issues. I skipped this once - my bad.
Mistake 2: Mixing Equity and Margin
Margin mess instead of pure equity inflates %. $100 000 cash + $50 000 margin = equity $100 000. $10 000 loss - 10%, not 6.7%. Keep it clean.
Mistake 3: Comparing Dollars, Not %
$5 000 drawdown on $100 000 - 5%, on $10 000 - 50%. Without % you can't compare accounts or periods. Basic slip-up.
Mistake 4: Short Period Only
3 months won't show the worst. Max drawdowns show over 12+ months. 6-month backtest - shocked by 40% live. Happened to me.
Mistake 5: Believing History Repeats
15% past - no guarantee. Next could be 25-35%. Take it as minimum, prep for 1.5-2x worse. Reality bites.
What to Calculate Next
Position Size Calculator
Size positions so drawdowns don't exceed your limit.
Risk/Reward Calculator
Check if setup profits cover the drawdown.
Average Position Calculator
From average cost, see drawdown to breakeven.
FAQ
Q: Max drawdown = peak-to-minimum loss?
A: Yeah, % from high to low until new peak. Synonyms - peak-to-trough, just another name.
Q: How often to recalculate?
A: Daily or after big trades if active. Swingers - weekly. Catch changes early.
Q: Can drawdown be negative?
A: No, only + or 0 - measures drops. 0 means never below peak. Negative doesn't happen.
Q: Worry for any strategy?
A: Yes, all have dips. Know max - avoid emotions and blowups in crises.
Q: Include commissions and slippage?
A: Must, use net equity after fees. Ignoring pumps returns, understates drawdowns.
Q: % drawdown 'normal'?
A: Depends on tolerance: conservatives <10%, balanced 10-20%, aggressive 20-40%. Funds max 15%.
Q: Drawdown vs losing streak?
A: Streak - consecutive, drawdown - cumulative from peak to valley. 10 small after high = 25%.
Q: Drawdown main risk metric?
A: No, pair with Sharpe, Sortino, win rate. Misses vol and consistency.
Q: Predict future from history?
A: Gives minimum, not forecast. Future easily bigger, esp market shifts. Use 1.5-2x.
Q: If no recovery?
A: Strategy failed - account blown or stopped. Drawdown from peak to end (100%). Positions and stops key.
Q: How to reduce max drawdown?
A: Smaller positions, tighter stops, diversify, hedge (shorts/options), aggressive takes. Calculator backtests options.
Q: Live drawdown = backtest?
A: No, live worse 10-30% from slippage, fills, emotions. Backtest ideal. Stress x1.5.
Q: Important for small accounts?
A: Even more. 20% on $1 000 - $200, okay. $10 000 - $2 000, hurts. Small needs low % - recovery demands high win rate.
Q: Leverage affects drawdown?
A: Multiplies it. 10% market move = 30% with 3x. Calculate net equity (post-margin cash), not notional.
Q: Drawdown vs underwater?
A: Drawdown - loss from peak (absolute). Underwater - currently below peak. Exit underwater at breakeven.