Maximum Drawdown
The largest peak-to-trough decline a portfolio or strategy has experienced over a measured period.
Formula
Maximum Drawdown = the largest value of (Peak - Trough) / Peak observed across the period
Unit
%
In depth
Maximum drawdown is the worst thing that has happened, not the worst thing that can happen, and treating the historical figure as a bound is a serious error — the next one may be larger. It depends on the period examined, so a strategy tested only since 2013 has never met a crisis and its maximum drawdown means correspondingly little. It is the denominator of the Calmar ratio and the single most useful number for judging whether an investor could actually have held a strategy. Pair it with the recovery time, since depth and duration test different things.
Worked example
A strategy returning 18% a year with a 55% maximum drawdown would have turned ₹10,00,000 into ₹4,50,000 at its worst point. Most investors who say they would hold through that have not experienced it.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Maximum Drawdown” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.