Maximum Drawdown

Measures the largest percentage decline from a portfolio's peak value to its subsequent lowest point, a key risk metric.

Written by the Vorzep Team

CryptoTradingRisk Management

Maximum Drawdown Calculator Risk Measure

MDD (%) = ((Trough − Peak) / Peak) × 100

MDD = maximum drawdown (negative %) · Peak = highest value before decline · Trough = lowest value after peak

⟹ Solve ⟷ MDD, Peak, Trough

Peak Value

Trough Value

Max Drawdown (MDD)

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Solve for: Max Drawdown (MDD) Peak Value Trough Value

Presets:

Max Drawdown —

—

Peak: — Trough: — MDD: —

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Drawdown Severity —

Mild (> -10%) Moderate (-10% to -30%) Severe (< -30%)

MDD = ((Trough − Peak) / Peak) × 100 · Drawdown is typically negative; a 30% loss means MDD = -30%.

Variables

Symbol	Quantity	Unit
MDD	Maximum drawdown	%
Trough Value	Lowest value after the peak	currency
Peak Value	Highest value before the decline	currency

What it means

Maximum drawdown (MDD) is the worst loss experienced from a peak to a trough. It is a measure of downside risk and is used to evaluate the risk of an investment. A lower MDD is preferable. This is used in portfolio risk analysis and in comparing investment strategies. Understanding MDD helps investors assess their risk tolerance and to avoid strategies with large drawdowns.

Worked example

Maximum Drawdown – Two Detailed Examples

Real‑World

Scenario: A portfolio peaks at $100,000 and later troughs at $62,000. Maximum drawdown = ((62,000 - 100,000) / 100,000) × 100 = -38.0%. This is the worst peak‑to‑trough decline. The investor uses this to assess the worst‑case historical loss and decide if they can stomach such a drop.

Parameter	Value
Peak Value	$100,000
Trough Value	$62,000

1MDD = ((62000 - 100000) / 100000) × 100 = -38%

Result -38% ✓ 38% drawdown

Scenario: A volatile crypto portfolio peaks at $50,000 and bottoms at $15,000, giving a drawdown of ((15000 - 50000) / 50000) × 100 = -70%. This severe drawdown may exceed many investors' risk tolerance. The portfolio manager uses this to set risk limits.

Parameter	Value
Peak	$50,000
Trough	$15,000

1MDD = ((15000 - 50000) / 50000) × 100 = -70%

Result -70% ✓ High drawdown

Insight: Maximum drawdown measures the largest decline from a peak to a trough. It is a key risk metric, especially for investors with low risk tolerance.

Common mistakes

Maximum drawdown: The largest peak‑to‑trough decline.
Trough value: The lowest point after the peak.
Peak value: The highest point before the trough.
MDD: Expressed as a negative percentage (loss).

Applications

Maximum drawdown (MDD) measures the largest peak‑to‑trough decline in portfolio value over a period. This is a key risk metric indicating the worst‑case loss. Investors use it to assess the downside potential of a strategy and to set risk tolerance. A lower MDD is preferable. Understanding MDD helps in portfolio construction and in managing emotional risk.

Assessing the worst‑case loss of an investment strategy
Setting risk tolerance and stop‑loss levels
Comparing the historical risk of different portfolios
Portfolio construction and risk management
Educational understanding of drawdowns