Angie · learn
Max drawdown
The deepest fall from a peak before a new peak was reached. The number that decides whether a strategy is one you could actually hold through.
Updated 2026-09-03
Maximum drawdown is the largest peak-to-trough fall the account suffered at any point in the test. It is measured from the highest point reached to the lowest point after it, so it captures the worst stretch as it was actually lived.
It is the single most useful number in a backtest report, and it is the one people skip. Returns tell you what a strategy earned. Drawdown tells you what you had to survive to earn it, and whether you would have.
The arithmetic that makes it worse than it looks
Recovering from a drawdown requires a larger gain than the loss. Down 20 percent needs 25 percent to get back. Down 50 percent needs 100 percent. Down 80 percent needs 400 percent. A deep drawdown is not merely a bad period, it is a period whose damage compounds against every future return.
See also
- Calmar ratio — Return measured against the worst loss along the way, rather than against general choppiness. It punishes the single deepest hole.
- Sharpe ratio — Return per unit of volatility. It asks how much turbulence you endured for the gain, so a smoother path scores better than a wild one that ends up level with it.
- ATR — The typical distance a price travels in a day. Used to size stops in the stock's own terms, so a volatile name gets more room than a quiet one.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
