Maximum Drawdown

    Category

    Risiko- & Money-Management

    Sub-category

    Drawdown-Management

    Curated by

    GlanWick Team

    Last reviewed

    · Methodology

    The maximum drawdown is the largest percentage decline of an equity curve from a peak to the subsequent trough before a new high is reached. If an account falls from $112,000 to $103,600, the maximum drawdown is 7.5 %. The metric measures a strategy's historically worst loss scenario – central for prop-firm traders because loss limits enforce a maximum permitted drawdown.

    Context & Mechanics

    Definition and calculation

    The maximum drawdown (MDD) measures the largest decline of an equity curve from a peak to the subsequent trough before a new high is reached. Formula: (peak − trough) ÷ peak. If an account falls from $112,000 to $103,600, the MDD is $8,400 or 7.5 %. Unlike the running drawdown, which describes any current decline, the MDD is the worst-case measure over the entire observation period.

    Informative value and limits

    The MDD shows which losing phase a strategy has historically gone through – and thus what psychological and financial strain a trader had to endure. Two limits matter: first, the MDD is sample-dependent; the worst drawdown statistically still lies in the future, so backtesting values only mark a lower bound. Second, it says nothing about duration: a shallow, months-long decline can be more taxing than a fast crash. Recovery maths also belongs to the picture: a 10 % loss requires +11.1 % to recover, 20 % requires +25 %, 50 % already +100 %.

    Relevance in prop trading

    Prop-firm rules are effectively predefined maximum drawdowns: an overall loss limit of 10 % ends the account exactly when the drawdown reaches that threshold. This implies a hard compatibility check: a strategy with a historical MDD of 15 % structurally does not fit a 10 % limit – regardless of how profitable it is long-term. The usual lever is smaller position sizing, which reduces the MDD proportionally, but also the return.

    Why it matters for traders

    Knowing a strategy's MDD lets a trader align account size, risk per trade and rulebook instead of leaving limits to chance. The GlanWick simulator calculates the maximum drawdown automatically from the equity curve and checks it against any loss limits – GlanWick is a training and simulation tool and not a prop firm itself.

    Execution Example

    A trader evaluates 100 trades on a $100,000 account ($1,000 risk per trade). The equity curve rose to $112,000 in the interim and then fell to $103,600 before making a new high.

    1. Identify the peak: highest point of the equity curve = $112,000.
    2. Identify the trough: lowest point after the peak before a new high = $103,600.
    3. Calculate the MDD: ($112,000 − $103,600) ÷ $112,000 = $8,400 ÷ $112,000 = 7.5 %.
    4. Interpretation: with a 7.5 % historical MDD the strategy would stay under a 10 % overall loss limit – but without a safety margin for a worse future path; halving risk per trade ($500) would have cut the MDD to about 3.75 %.

    Execution Risk & Errors

    1

    Reading the backtest MDD as a guaranteed ceiling for the future

    2

    Confusing maximum drawdown with the running drawdown

    3

    Ignoring the duration of losing phases and looking only at depth

    4

    Underestimating recovery maths (−50 % requires +100 %)

    5

    Deploying a strategy with a higher historical MDD than the loss limit in a challenge

    Frequently Asked

    What is a good maximum drawdown?

    It depends on strategy and rulebook. For prop-firm accounts a rule of thumb applies: the historical MDD should sit clearly below the overall loss limit to keep a safety margin for worse paths.

    How does the maximum drawdown differ from the drawdown?

    The drawdown describes any current decline from the last high; the maximum drawdown is the largest of these declines over the entire observation period – the historical worst-case measure.

    Can I reduce the maximum drawdown?

    The most effective lever is smaller risk per trade: halving position sizing approximately halves the MDD – but also the absolute return.

    Why is the backtest MDD not enough for planning?

    Because it is sample-dependent: a strategy's worst drawdown statistically still lies in the future. Backtest values mark a lower bound, not a guarantee.

    This Website Uses Cookies

    We use technically required cookies so the platform works. Optional cookies are only set with your explicit consent.

    Legal basis: Art. 6(1)(a) GDPR. You can withdraw your consent at any time via the "Cookie Settings" link in the footer.

    More information in our Privacy Policy · Imprint