Maximum Drawdown

Glossary Updated 2026-09-05

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Definition

Maximum Drawdown (MDD) measures the largest peak-to-trough decline in portfolio value over a specific time period. It represents the worst-case loss from peak that an investor would have experienced.

Calculation

code
1MDD = (Trough Value - Peak Value) / Peak Value

Where peak is the highest portfolio value before the decline and trough is the lowest value before a new peak is established. ```

Usage

Maximum drawdown is used for:

  • Risk assessment and comparison between strategies
  • Position sizing and risk budgeting
  • Setting investor expectations
  • Stress testing portfolios
  • Evaluating strategy robustness across market conditions
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