Max drawdown scans the whole equity curve and keeps the deepest fall from any high to a later low. It is the standard measure of downside risk in backtests and performance reports, and it is often shown together with the recovery time, meaning how long it took to make a new high.
Example
An account goes $10,000 → $13,000 → $11,700 → $15,000 → $11,250 → $16,000. The first drawdown is 10%; the second is ($15,000 − $11,250) ÷ $15,000 = 25%. The max drawdown is 25%, even though the account finished 60% higher.
Why it matters
Returns alone hide how painful the path was. Two strategies that both made 40% are very different if one had a 10% max drawdown and the other 45%. Max drawdown also guides position size: if you cannot accept a 30% drop, size so that your expected worst case stays well below it.
Common mistake
Assuming the backtest's max drawdown is the worst that can happen. The historical maximum comes from a single path, and live trading often brings a deeper one. Planning for 1.5 to 2 times the tested max drawdown is a common rule of thumb.
Put it into practice
- Free toolDrawdown recovery & compounding calculatorSee the gain you need to recover from any drawdown, how many losses in a row get you there, and how a steady return compounds over time.
- Free toolRisk of ruin calculatorHow likely is a deep drawdown with your win rate, reward:risk and risk per trade? Thousands of simulated trade sequences give you the odds.
- In FlowsenseAnalyticsWin rate, expectancy, profit factor and drawdown from your own trades, broken down by setup, session and hold time.
FAQ
- What is a good max drawdown?
- One you can live with without changing your rules. Many traders aim to keep it under 20–25%; prop firms usually cap it at 5–10% of the starting balance.
- How is max drawdown different from drawdown?
- A drawdown is any decline from a peak; the max drawdown is the largest of them over the period you measure.
- Does max drawdown include open positions?
- On an equity curve, yes. A max drawdown based on balance only counts closed trades and can understate the real dip.