Maximum drawdown is the largest decline from an equity peak to a later trough during a specified observation period. It describes the depth of a historical loss sequence, rather than simply the return between the first and last dates.
A simple example
Suppose a hypothetical account reaches $10,000, then falls to $8,000 before recovering. That decline is a 20% drawdown: the $2,000 loss divided by the earlier $10,000 peak. If no deeper peak-to-trough decline occurs in the period, the maximum drawdown is 20%.
Recovery is not symmetrical. Moving from $8,000 back to $10,000 requires a 25% gain. A 20% decline and a 20% recovery do not cancel each other out.
What the statistic leaves out
The same maximum drawdown can arise over a day or over many months. Duration and recovery time therefore add important context. A strategy can also have repeated smaller drawdowns that are difficult to see in one maximum figure.
Calculation choices matter: end-of-day equity can miss intraday losses, and open positions may or may not be included. Deposits and withdrawals also need appropriate treatment.
Historical maximum drawdown is not a guaranteed future loss limit. New market conditions can produce a larger decline, even when a strategy’s earlier record looked stable.