Drawdown (DD) measures the decline in account equity due to losing trades over a period, expressed as a percentage. Maximum drawdown (Max DD) is the largest decline from the highest point to the lowest point over the account’s lifetime.
Formula
DD is calculated against the account return (see Return calculation). The highest return recorded over the account’s life is the Maximum return.
DD = (1 − (1 + Return) / (1 + Maximum return)) × 100
• If Return = Maximum return, DD = 0 (no loss in that period).Worked Example
Using the three period returns from the return-calculation example, with a Maximum return of 3.6000:
| Period | Return | Maximum return | DD |
|---|---|---|---|
| P1 | 3.6000 | 3.6000 | 0% |
| P2 | 1.3636 | 3.6000 | 1 − (1 + 1.3636)/(1 + 3.6000) = 48.62% |
| P3 | 1.0000 | 3.6000 | 1 − (1 + 1.0000)/(1 + 3.6000) = 56.52% |
The highest DD over the account’s lifetime — 56.52% here — is recorded as the Max DD.
