Max drawdown is the largest fall in your account from a running peak to a later low, usually quoted as a percentage of that peak. If your balance climbed to $10,900 and then dropped to $9,800 before making a new high, your max drawdown is 10.1%. It answers a question that profit alone cannot: how much did it hurt on the way to that profit? This page gives the formula, works it on nine closing balances, shows why bigger drawdowns need disproportionately bigger recoveries, and covers the three ways the number is measured differently.
The max drawdown formula
Drawdown = (peak − current value) ÷ peak
Max drawdown = the largest drawdown reached over the period
- Peak: the highest value the account has reached up to that point. It only ever moves up.
- Current value: the balance (or equity) now. While it sits below the peak the account is "in drawdown".
- Max drawdown: the deepest of all those readings. In dollars it is peak minus trough. As a percentage it is that gap divided by the peak.
Note the order: the low must come after the high. A balance that rose from $9,000 to $10,000 has no drawdown, however low it started. See max drawdown in the glossary.
How to calculate max drawdown: a worked example
Nine closing balances, in order, starting from $10,000:
| Day | Balance | Running peak | Drawdown |
|---|---|---|---|
| 1 | $10,000 | $10,000 | 0.00% |
| 2 | $10,400 | $10,400 | 0.00% |
| 3 | $10,900 | $10,900 | 0.00% |
| 4 | $10,300 | $10,900 | 5.50% |
| 5 | $9,800 | $10,900 | 10.09% |
| 6 | $10,600 | $10,900 | 2.75% |
| 7 | $11,200 | $11,200 | 0.00% |
| 8 | $10,700 | $11,200 | 4.46% |
| 9 | $11,500 | $11,500 | 0.00% |
- Track the running peak: the highest balance seen so far, in the third column.
- Each day, drawdown = (peak − balance) ÷ peak. Day 5: ($10,900 − $9,800) ÷ $10,900 = 10.09%.
- Max drawdown is the largest value in the last column: 10.09%, or $1,100.
The account finished 15% higher, yet at one point it was 10% below its best. The drawdown began on day 4 and ended on day 7, when the balance passed the old $10,900 peak. That span, from peak to new high, is the drawdown's duration. The day 8 dip of 4.46% was a smaller, separate drawdown and does not change the maximum.
Why a bigger max drawdown is harder to recover
Losses and gains do not cancel evenly. After a fall of d, the gain needed to get back to the old peak is d ÷ (1 − d):
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
A 10% drawdown needs a little over 11% to repair. A 50% drawdown needs a 100% gain, and the same trader who lost it in a few weeks may need years to earn it back. This is the practical reason to cap drawdown rather than only chase return.
Three ways max drawdown is measured differently
- Dollars or percent. A $1,100 fall is 10.1% of $10,900 but 2.2% of $50,000. Use percent to compare accounts of different sizes, and dollars when a firm's rule is written in dollars.
- Closing balance or intraday equity. The table above uses closes. Measured on open equity, a trade that dipped $600 during the day and recovered shows up as a deeper drawdown. Neither is wrong, but they give different numbers for the same trades. ExpectancyIQ builds max drawdown from end-of-day results. For why this decides whether a prop account survives, see end-of-day vs intraday drawdown.
- Peak-to-trough or from the start. The statistic above is measured from a running peak. Many prop firms instead measure from the starting balance (a static limit) or from a peak that trails your highest balance. Those are rules, not statistics, and they can end an account at a smaller fall than your max drawdown shows. The prop firm drawdown calculator finds the floor for each type.
What max drawdown does not tell you
- It is a record, so it grows with history. The longer the period, the more chances for a deeper fall. A 3-month max drawdown and a 3-year max drawdown are not comparable, and a short history will flatter you. Your worst drawdown is probably still ahead of you.
- It uses one path. The same trades in a different order would give a different max drawdown. The Monte Carlo simulator reshuffles your results to show the range of drawdowns the same edge can produce.
- It ignores time. A 10% fall that recovers in a week and a 10% fall that takes a year to recover share a max drawdown. Look at how long the account stayed below its peak as well.
- It is one number from one point. It says nothing about how often you drew down. Read it with expectancy and profit factor and enough trades; see how many trades before you can trust a statistic.
Max drawdown in return ratios
Max drawdown is the denominator of the Calmar ratio, which divides annualised return by it. It sits beside, not inside, Sharpe and Sortino: those measure the scatter of returns, while max drawdown measures the single worst slide. A system can look calm on volatility and still have a deep drawdown if its losses arrive in a row.
Setting a drawdown limit
Max drawdown is a result; a drawdown limit is a rule you set first. See risk management for traders for how the limit connects to risk per trade and position size.
Calculating max drawdown in a spreadsheet
Put your balance after each day (or each trade) in column A from row 2. In B2 enter =MAX(A$2:A2) and fill down to get the running peak. In C2 enter =A2/B2-1 and fill down to get each drawdown as a negative percentage. Max drawdown is then =-MIN(C2:C100), with the range covering your rows. For the dollar figure, add a column D of =B2-A2 and take its maximum.
ExpectancyIQ shows the same figure for you. The equity view plots your balance with how far you sit below your peak, and the maximum drawdown in percent, from the trades you import; the methodology states exactly how it is defined.