# Maximum Drawdown

> Maximum drawdown measures the largest fall from a peak to a trough in an account or strategy. Learn how to calculate it, recovery maths, duration and how to use it.

Source: https://learn.tradelabsai.com/portfolio/maximum-drawdown/  
Track: Portfolio and Performance · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Maximum Drawdown", https://learn.tradelabsai.com/portfolio/maximum-drawdown/

Maximum drawdown (MDD) is the largest percentage fall from a peak in account value to a subsequent low, before a new peak is reached. It answers a simple, painful question: what is the worst loss someone would have suffered if they had started at the worst possible moment? Many traders find maximum drawdown more meaningful than volatility, because drawdowns are what cause investors to redeem, traders to abandon systems and leveraged accounts to be liquidated.

## The calculation

```
Drawdown at time t = (Value at t - Highest value up to t) / Highest value up to t
Maximum drawdown = The most negative drawdown over the period
```

In pandas: `drawdown = equity / equity.cummax() - 1` and `max_dd = drawdown.min()`. See [NumPy and Pandas for Traders](https://learn.tradelabsai.com/programming/numpy-and-pandas-for-traders/).

**Example: Finding the maximum drawdown**
An account starts at $100,000, rises to $120,000, falls to $84,000, recovers to $110,000, rises to a new high of $130,000, then dips to $117,000. The first drawdown is from $120,000 to $84,000: a fall of $36,000, or 30%. The second is from $130,000 to $117,000: 10%. The maximum drawdown is 30%. To recover from $84,000 to the $120,000 peak, the account needed a gain of about 42.9%, not 30%. Try other values in the [Drawdown Recovery Calculator](https://learn.tradelabsai.com/tools/drawdown-recovery-calculator/).

## The recovery problem

| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |

```
Gain needed = 1 / (1 - Drawdown) - 1
```

Losses compound against you: the deeper the hole, the disproportionately harder the climb. This is the mathematical case for strict risk management. See [Risk of Ruin](https://learn.tradelabsai.com/risk/risk-of-ruin/) and [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/).

## Drawdown duration

Depth is only half the story. Drawdown duration is the time from a peak to the recovery of that peak. A strategy that falls 15% and recovers in two months feels very different from one that falls 15% and takes three years to recover. Track:

| Measure | Meaning |
|---|---|
| Maximum drawdown depth | Worst percentage fall |
| Maximum drawdown duration | Longest time below a previous peak |
| Time to trough | How quickly the loss happened |
| Recovery time | How long it took to regain the peak |

The [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/) combines depth and duration into one figure.

## Historical examples

| Asset | Approximate maximum drawdown |
|---|---|
| US stocks (S&P 500), 1929 to 1932 | Around 85% |
| US stocks, 2007 to 2009 | Around 57% |
| Nasdaq Composite, 2000 to 2002 | Around 78% |
| Bitcoin, late 2021 to late 2022 | Around 77% |

Even broad, diversified markets can lose more than half their value. See [The 1929 Crash](https://learn.tradelabsai.com/history/the-1929-crash/), [The 2008 Financial Crisis](https://learn.tradelabsai.com/history/the-2008-financial-crisis/) and [The Dot-Com Bubble](https://learn.tradelabsai.com/history/the-dot-com-bubble/).

## Using maximum drawdown

1. **Set risk limits** based on drawdowns you can tolerate. See [Risk, Position, Loss and Drawdown Limits](https://learn.tradelabsai.com/portfolio/risk-limits/).
2. **Size positions** so that a drawdown worse than the backtest's worst is survivable.
3. **Expect worse live:** a backtest's maximum drawdown is one sample; the future's worst can be deeper.
4. **Use Monte Carlo** reshuffling of returns to estimate a range of possible drawdowns. See [Monte Carlo Simulation](https://learn.tradelabsai.com/research/monte-carlo-simulation/).
5. **Compare strategies** with return to drawdown ratios. See [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/).

## Limitations

- **One event:** it describes the single worst episode, not typical drawdowns.
- **Path dependent:** the same returns in a different order give a different maximum drawdown.
- **Grows with time:** longer records usually show deeper drawdowns.
- **Data frequency:** daily data shows deeper intraday falls than monthly data hides.

## Frequently asked questions

### What is maximum drawdown?

The largest percentage decline from a peak in account or portfolio value to a later low, before a new peak is reached.

### How much gain is needed to recover from a drawdown?

One divided by (one minus the drawdown), minus one; a 50% drawdown requires a 100% gain to recover.

### What is an acceptable maximum drawdown?

It depends on the investor and strategy, but many traders aim to keep drawdowns below 20% to 25% through position sizing and risk limits.

Next, learn a measure that includes how long losses last in [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/).

## Continue learning

- Next lesson: [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/)
- Previous lesson: [Profit Factor](https://learn.tradelabsai.com/portfolio/profit-factor/)
- Related: [Profit Factor](https://learn.tradelabsai.com/portfolio/profit-factor/): Profit factor divides gross profits by gross losses to show whether a strategy makes more than it loses. Learn the formula, good values and how it links to win rate.
- Related: [Calmar and MAR Ratio](https://learn.tradelabsai.com/portfolio/calmar-and-mar-ratio/): The Calmar and MAR ratios compare annual return with maximum drawdown. Learn the formulas, how they differ, a worked example and their strengths and weaknesses.
- Related: [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/): The Ulcer Index measures downside risk by combining how deep and how long drawdowns last. Learn the formula, a worked example, the Martin ratio and how to use it.
- Related: [Drawdown Recovery Calculator](https://learn.tradelabsai.com/tools/drawdown-recovery-calculator/): Free drawdown recovery calculator. Enter a drawdown percentage to see the gain needed to get back to break even and how long recovery may take.
- Related: [Risk of Ruin](https://learn.tradelabsai.com/risk/risk-of-ruin/): Risk of ruin is the chance that losses drain your account beyond recovery. Learn what drives it, see simulated numbers and how to keep it low.
- Related: [Risk, Position, Loss and Drawdown Limits](https://learn.tradelabsai.com/portfolio/risk-limits/): Risk limits turn a risk policy into hard rules on position size, exposure, daily loss and drawdown. Learn how to set them, enforce them and avoid mistakes.