Risk · Concept note
Maximum Drawdown
The largest percentage decline from an equity peak to a subsequent trough during the measurement period.
Definition
Maximum drawdown (MDD) shows the greatest retreat from a previous equity high. Unlike a single-period loss, it treats the decline until that high is recovered as one episode. It is a path-dependent measure used to compare backtest and live risk.
Why it matters
A high-return strategy can still have an intolerable drawdown. Because the gain needed to recover rises disproportionately as losses deepen, judging a strategy by return alone understates risk.
Calculation and example
Drawdown = (current equity − prior peak equity) ÷ prior peak equity × 100
If equity rises from 10,000 to 12,000 USDT and then falls to 9,000, drawdown is (9,000−12,000)÷12,000 = −25%. Recovering from 9,000 to 12,000 then requires about a 33.3% gain.
What to check when interpreting it
- Review depth, duration, and recovery time together.
- Compare strategies over the same period and cost assumptions.
- Investigate regime change when live drawdown exceeds the backtest range.
Common misconception
Historical maximum drawdown is not a ceiling on future losses. Unseen market conditions can produce a larger decline.