Drawdown

Drawdown is the peak-to-trough decline in an account or portfolio value before a new peak is reached. Maximum drawdown (MDD) is the largest such decline over a given period. A 20% drawdown means the account declined 20% from its highest point before recovering. It is the single most important risk metric for evaluating trading strategies.

How Drawdown Is Used in Trading

Maximum drawdown determines the psychological and financial survivability of a strategy. A strategy with 60% returns but a 50% maximum drawdown is less practical than one with 30% returns and a 15% drawdown, because most traders cannot psychologically tolerate losing half their capital before recovery.

Drawdown duration matters as much as depth. A 15% drawdown that lasts two weeks is far easier to endure than one lasting six months. Backtesting should measure both maximum drawdown percentage and the longest drawdown recovery period.

Algorithmic traders use drawdown-based position sizing and circuit breakers. If the current drawdown exceeds a threshold (e.g., 10%), the system reduces position sizes or pauses trading until conditions improve. This adaptive risk management prevents catastrophic losses during adverse market regimes.

Access via API

Use historical OHLCV data to calculate drawdown for your strategies and instruments.