Maximum drawdown is the largest peak-to-trough decline over a period.
What it is
Maximum drawdown (MDD) measures the worst peak-to-trough decline in value over a chosen window — from a high-water mark down to the lowest point that follows it, before any new peak is set. It is expressed as a percentage of the prior peak, usually as a negative number (e.g., −38%) or its absolute size. Unlike volatility, which treats up-moves and down-moves alike, MDD captures only realized downside: the deepest hole an investor would have sat in had they bought at the worst possible top.
Why it matters
MDD quantifies worst-case pain and is a better proxy for the risk of capitulating at the bottom than standard deviation. A strategy with a smooth average return but a −60% drawdown is one most people cannot actually hold through. The pitfall: it is purely backward-looking and path-specific — it tells you the single worst stretch that already happened, not how long recovery took, how often deep drawdowns recur, or what the next one will be. A small historical MDD can lull you into underestimating tail risk, especially for assets with short or calm sample periods.
How it's calculated
Track the running high-water mark (the highest value reached so far) across the period. At each point compute the drawdown as the current value minus that prior peak, divided by the peak — a non-positive percentage. The maximum drawdown is the most negative of all those readings, i.e., the deepest peak-to-trough fall observed before a new peak was made.
How Quintarthai uses it
A company's deep-analysis page shows historical price drawdowns alongside volatility so you can gauge worst-case downside, not just average risk. Pair it with related risk concepts in the Knowledge Base to read MDD in context with return.
Cross-border note. MDD is currency-aware: a Canadian holding a US stock, or vice versa, experiences a different drawdown than a local-currency investor, because CAD/USD moves can deepen or cushion the fall. Always check whether a quoted drawdown is in the asset's listing currency or your home currency before comparing TSX- and US-listed names.
FAQ
Is a smaller maximum drawdown always better?
Lower MDD signals better capital preservation, but compare it against return. A fund with a tiny drawdown and tiny returns may simply be barely invested. Metrics like the Calmar ratio divide annualized return by MDD to judge return earned per unit of worst-case pain.
Does maximum drawdown tell me how long it takes to recover?
No. MDD only measures the depth of the worst fall, not its duration. Two assets can share a −40% drawdown while one recovers in months and the other takes years. For recovery, look separately at the drawdown's length or 'time to new high.'
Check your understanding
A portfolio rose from $100k to a peak of $150k, fell to a low of $90k, then recovered to $130k by period end. What is its maximum drawdown?
MDD is the deepest peak-to-trough drop: from the $150k high-water mark down to the $90k trough, ($90k − $150k) ÷ $150k = −40%. The starting value and ending recovery are irrelevant to the calculation.