How to calculate maximum drawdown
Max drawdown = (Peak value − Trough value) ÷ Peak value × 100
Gain to recover = 1 ÷ (1 − Drawdown) − 1
Drawdown is always measured against the peak. Measuring against the trough would overstate it (a fall from 12,000 to 9,000 would appear as 33% instead of 25%).
Worked example
- An account peaks at $12,000 and falls to $9,000.
- Drawdown = (12,000 − 9,000) ÷ 12,000 = 25%.
- Recovering requires 12,000 ÷ 9,000 − 1 = +33.3%.
- A fall from 1,561.80 to 683.38 is a 56.2% drawdown that needs a +128.5% gain to recover.
How to interpret maximum drawdown
Max drawdown is the most intuitive risk number: the worst loss you would have suffered buying at the top. It matters more than volatility for most traders, because it is what tests your discipline. Look at duration too — a 20% drawdown that lasts three years is often harder to sit through than a 30% one that recovers in three months.
The losses-compound asymmetry is why sizing matters; the compound growth calculator shows how risk per trade drives drawdowns.
Limitations and common mistakes
- Max drawdown from a backtest is a minimum estimate — the worst drawdown is usually still ahead.
- Remove deposits and withdrawals from the equity curve first.