Drawdown and Maximum drawdown calculation

Learn about Drawdown (DD) and Maximum Drawdown (Max DD) calculations, and understand how DD measures equity decline and Max DD indicates the largest lifetime equity drop during trading

Drawdown (DD) measures the decline in the equity of a trading account due to losing trades over a specific period, expressed as a percentage.

Maximum drawdown (Max DD) indicates the largest decline in the equity of a trading account from the highest point through the lowest point during the account's lifetime.

Formulas

DD is calculated against the account return that, in its turn, is calculated for periods between balance operations made on that account (for details, refer to Return calculation).

Suppose that the following return ratios are calculated for a trading account over three periods:

Periods	Return	Maximum return
Period 1	3.6000	3.6000
Period 2	1.3636	3.6000
Period 3	1.0000	3.6000

The highest return during the account's lifetime, which is 3.6000 in this example, is recorded as the Maximum return for the account.

If the return for a specific period is equal to the Maximum return, then the DD for that period is 0 (zero), meaning that no losses were incurred on the account.

If the return for a specific period isn’t equal to the Maximum return, the DD is calculated as follows:

DD = 1 - (1 + Return) / (1 + Maximum return) * 100

where:

• Return is the account return calculated for a period between balance operations.

• ‍Maximum return is the highest return recorded for the account during the account's lifetime.

In this example:

The Period 1 DD is 0.

The Period 2 DD is calculated as follows:

DD P2 = 1 - (1 + 1.3636) / (1 + 3.6000) = 0.4862 * 100 = 48.62%

The Period 3 DD is calculated as follows:

DD P3 = 1 - (1 + 1.0000) / (1 + 3.6000) = 0.5652 * 100 = 56.52%

The highest DD during the account's lifetime, which is 56.52% in this example, is recorded as the Max DD for the account.