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Maximum Drawdown (MDD)

Maximum drawdown is the largest percentage drop from a peak to a later trough in an investment's value before a new peak is reached, showing the worst loss an investor would have endured.

What Is Maximum Drawdown?

Maximum drawdown (MDD) measures the largest decline that an investment or portfolio has suffered from a peak to a later low point, before its value rises above that peak again. It is expressed as a percentage of the peak value. While volatility shows how much prices move up and down, maximum drawdown shows how deep the worst losing stretch actually was.

How It Is Calculated

The calculation tracks the running high of a value and, at each point, measures how far the value has fallen below that high. The largest of these declines over the period is the maximum drawdown:

MDD = (Trough Value − Peak Value) ÷ Peak Value

Because the trough value is lower than the peak, the raw result is negative. Many sources report it as a positive number, so a 30% drawdown may be written as "30%" or "-30%". Both mean the same thing.

For example, a portfolio grows to $100,000, then falls to $70,000 during a downturn. It later recovers to $100,000 and climbs to $120,000, then drops to $90,000. The first decline is 30%, and the second is 25% measured from the $120,000 peak. The maximum drawdown is 30%, the larger of the two.

Why It Matters to Investors

Maximum drawdown shows the kind of loss an investor could have experienced in practice, which average returns and standard deviation do not always reveal. It is also used to compare the risk of different strategies. A Sharpe ratio or return on investment can look attractive while hiding a severe drawdown, so many investors examine both.

The measure has limits. It describes only one historical path, so past drawdowns do not guarantee the size of future ones. The result also depends on the time period studied, since a shorter sample may miss a larger decline. Recovery time, the time needed to climb back to the previous peak, is often reported alongside it, because a deep decline can take a long time to recover from.

Updated October 21, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Volatility

Volatility is a statistical measure of how much and how quickly an asset's price moves up or down over a given period, with higher volatility indicating larger price swings.

Standard Deviation

Standard deviation is a statistical measure of how widely a set of values, such as investment returns, spreads out around their average, with larger figures indicating greater variability and risk.

Sharpe Ratio

The Sharpe ratio measures how much return an investment earns above a risk-free rate for each unit of its volatility, using standard deviation as the measure of risk.

Return on Investment (ROI)

Return on investment (ROI) is a measure that compares the gain or loss from an investment to its cost, expressed as a percentage, to show how efficiently the money was used.

Drawdown

A drawdown is the decline in an investment's value from its highest previous level to a later low, usually expressed as a percentage of that peak.

Bear Market

A bear market is a prolonged period in which prices of securities, usually a broad stock market index, fall by 20% or more from recent highs, often accompanied by widespread pessimism.

Value at Risk (VaR)

Value at Risk (VaR) is a statistical measure estimating the maximum loss a portfolio could suffer over a set time period at a given confidence level, under normal market conditions.