How to Calculate Maximum Drawdown: Measuring the Decline from a Previous Peak
Maximum drawdown measures the deepest decline from an earlier peak during a period. Learn to account for cash flows, observation frequency, and recovery time alongside overall returns.
Maximum drawdown, or MDD, shows how far asset value fell from a previous peak over an observation period. Calculate the drawdown at each point, then find the largest decline. Even a good return between the start and end dates can involve a substantial drawdown along the way, making MDD useful for assessing the burden of staying invested.
Always compare with a peak that occurred earlier
Record the highest value reached up to each date, divide the current value by that high, and subtract 1 to calculate drawdown. When expressed as negative numbers, the lowest value is MDD. Some sources report loss magnitude as a positive number, so check the sign convention. Selecting the highest and lowest values over the entire period without regard to sequence can incorrectly measure a loss from a peak that occurred after the trough. A peak before the start date may be excluded depending on how the analysis period is defined.
Remove apparent drawdowns caused by deposits and withdrawals
Not every decrease in an account balance is an investment loss. Living-expense withdrawals and transfers to other accounts also reduce balances. To evaluate performance, use a unit value or return index adjusted for external deposits and withdrawals. If dividends are received and then withdrawn, distinguish total return including dividends from price return. MDD based on daily valuations can differ from MDD based on month-end valuations: a midmonth selloff that recovers before month-end is hidden in monthly data.
Read drawdown depth together with recovery time
Two portfolios with the same MDD can have different implications for funding plans if one recovers its previous peak in a month and the other takes years. Record the time from peak to trough, the time to regain the peak, and any drawdown still unrecovered separately. Historical MDD is not a ceiling on future losses and may look small if no crisis occurred during the observation period. Before comparing strategies, align the period, observation frequency, and treatment of costs.
When downloading data, check whether delisted stocks or discontinued strategies have been excluded. Results containing only survivors may not represent the risk involved in the actual selection process. For daily records of your own account, check that missing dates have not been arbitrarily filled with the previous day's values in a way that erases a sharp decline. Record the data source and adjustment method alongside the drawdown figure so others can reproduce the calculation.
Worked example
Hypothetical example: With no deposits or withdrawals, a unit value moves 100→120→90→110→130→117. The drawdown from 120 to 90 is 90÷120−1=−25%, while the later decline from 130 to 117 is −10%. The overall MDD is therefore −25%. The final return is 117÷100−1=17%, so the investment ends with a gain but loses one-quarter of its value from a peak along the way. Connecting the overall high of 130 with the earlier low of 90 gives −30.77%, but this is not the period's MDD because the sequence is wrong.
What to check
- Did the peak occur before the trough?
- Have you used a unit value adjusted for deposits and withdrawals?
- Have you indicated the difference between daily and monthly data?
- Have you recorded recovery time and whether the drawdown remains unrecovered?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.