Forex glossary
Maximum Drawdown
Maximum drawdown is the largest decline in a chosen capital measure from an earlier peak to a later value within the observation period. It can be absolute or percentage-based, and recovery need not occur. Window, valuation frequency and cash-flow treatment affect the result.
Illustrative example
How does it work in practice?
Suppose the complete equity path is 1,000 → 1,200 → 900 → 1,100 USD with no cash flows. The maximum fall is 300 USD, or 25% of the 1,200 USD peak, despite incomplete recovery.
Drawdown is measured from a peak
A case to work through
Two equity declines
Model without cash flows: equity is 1,000 → 900 → 1,100 → 990 → 1,050 USD.
- The first decline is 100/1,000 = 10%; the second 110/1,100 = 10%.
- Final current drawdown is 50/1,100 ≈ 4.55%, but maximum percentage drawdown remains 10%.
What follows? Keep peak history rather than only the latest balance.
Example boundary: The single peak-and-trough calculator does not search a whole series for its maximum.
Current versus historical maximum
Text description of the diagram
- First decline: 1,000 → 900 USD: 10%.
- Second decline: 1,100 → 990 USD: 10%.
- Sample end: 1,050 USD: currently about 4.55% below the peak.
A useful distinction
Maximum Drawdown / Drawdown
Drawdown can describe a current decline; maximum drawdown selects the largest in a window.
Change an assumption, see the result
What changes if…?
Calculate one peak-to-trough decline; finding a history’s maximum requires comparing all relevant peaks.
Model of one capital series without deposits or withdrawals. Use either balance or equity consistently. A decline measured from the peak differs from the percentage gain needed to recover.
Check your understanding
Separate the historical maximum from current drawdown.
Show the answer and explanation
15%
The first decline is 300/2,000, or 15%.
Net results and risk measures
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Read the fuller explanation
Related terms
Sources and documentation
- MetaTrader 5: Trading Report
The report distinguishes results before and after swaps and commissions and reports drawdown of the selected balance or equity measure from a local peak.
Document read: - Empyrical: performance-metric documentation
Calmar calculation documentation; a metric implementation source, not an effectiveness study.
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.