Maximum Drawdown

Maximum drawdown is the largest peak-to-trough decline an account or strategy has experienced over a period, expressed as a percentage of the peak. It answers the question every risk metric circles around: what is the worst it has actually been?

Max drawdown matters more than average returns for survivability. It sets the pain a trader must sit through without abandoning the system, and in prop-firm evaluations it is a hard rule — breach the total loss limit once and the account is gone. A strategy’s historical max drawdown is also a floor, not a ceiling: the worst drawdown is usually still ahead, because the past sample never contains every market regime.

When comparing strategies, return divided by max drawdown is often more decision-relevant than return alone — most traders cannot psychologically survive the equity path that produced an attractive headline number.