Max Drawdown for Traders: What It Is and How It’s Calculated
Learn what max drawdown means, how to calculate it step by step, and how to use it to set limits, compare strategies, and stay consistent.
What Is Max Drawdown?
Max drawdown is the largest peak-to-trough decline in your account value over a period. It answers a simple question: what was the worst percentage drop from a high before a new high was made? An equity curve is your account value plotted over time. A peak is the highest point reached so far; a trough is the lowest point that follows that peak before a new high.
Max drawdown helps set expectations for losses during a strategy’s cold streak. It does not tell you future risk by itself, but it summarizes the worst historical slide your account experienced while following a method.
How to Calculate Max Drawdown (Step-by-Step)
- List your equity values over time (daily balance, cumulative PnL, or each closed trade).
- Track the running peak: the highest equity value seen up to each point.
- At each point, measure the decline from the running peak as a percentage.
- The largest percentage decline you observe is the max drawdown.
Example:
| Point | Equity | Running peak | Drawdown |
|---|---|---|---|
| A | $10,000 | $10,000 | 0% |
| B | $12,000 | $12,000 | 0% |
| C | $8,400 | $12,000 | 30% |
| D | $9,600 | $12,000 | 20% |
Here, the max drawdown is 30% from point B to C. Even though equity later improves to $9,600, the worst drop remains 30% until a new high above $12,000 is made. Use percentages rather than dollar amounts to compare across accounts or strategies.
Why Max Drawdown Matters
- Capital survival: Strategies with deep historical drawdowns require more capital and emotional resilience to ride out losing streaks.
- Apples-to-apples comparison: If two methods have similar returns, the one with lower max drawdown generally offers a smoother ride.
- Expectation setting: Knowing past worst-case declines helps you avoid abandoning a sound plan at the first rough patch.
Intraday traders may see shorter but sharper drawdowns; swing traders might face longer declines that test patience. In both cases, using max drawdown as a key risk metric helps keep decisions consistent.
Putting Max Drawdown Into Practice
- Define a limit: Decide the maximum drawdown you can tolerate (e.g., 10% or 20%). This becomes your “uncle point.”
- Align position size: Choose trade size so that typical drawdowns in testing stay within your limit. If backtests show 15% drawdown, sizing for a 10% limit likely means smaller positions.
- Set review rules: If live drawdown reaches your limit, pause, review trades and assumptions, and reduce risk until you regain a new high.
- Compare systems: For similar returns, prefer the approach with the smaller max drawdown. It’s often easier to follow consistently.
Want to rehearse these ideas without financial risk? Read our guide on how to practice trading without risk, then measure drawdowns on your equity curve as you practice.
When you’re ready to train, ChartingPark lets you practice on accelerated historical charts (powered by TradingView) so you can quickly measure drawdown and other results across many repetitions. Start practicing at https://app.chartingpark.com.