Maximum drawdown: what it is and how to calculate it
The account grew from 10,000 to 15,000, then dropped to 11,000. Formally you're up — yet it feels like failure, and that's exactly when strategies get abandoned. Maximum drawdown shows the deepest fall from a peak, and it decides whether you can stick with your system.
What drawdown is
Drawdown is a fall in capital from its previous high. If the account grew to 12,000, then dropped to 9,600 and only then set a new high, the drawdown was 2,400, or 20%.
Maximum drawdown is the deepest of all over the period. Important: it is measured from the peak, not from the starting deposit. An account that grew from 10,000 to 15,000 and fell to 11,000 is still up, but the drawdown is 26.7%.
Why drawdown matters more than return
To recover from a drawdown you need to earn more than you lost:
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
Two strategies with the same annual return are not equal at all if one has a 10% drawdown and the other 45%. In practice the second gets abandoned at the bottom — right before the recovery.
Two strategies with the same return are not equal: a deep drawdown gets abandoned at the bottom — right before the recovery.
Deposits and withdrawals are not drawdown
If drawdown is calculated from the account balance, a withdrawal looks like a fall in capital and a deposit like a new high. The right way is to calculate from trading results: deposits and withdrawals shift both the capital and its peak by the same amount.
How to use the number
- Compare return with drawdown. The ratio of annual return to maximum drawdown shows how much you get for every percent of “pain”.
- Leave a margin. The historical maximum drawdown is not a limit. The future one can be deeper: over a long run, losing streaks get longer than the ones you've already seen.
- Watch the current drawdown. If it's approaching the historical maximum, that's a reason to lower risk and check whether the market has changed.
A “what if” check
A useful test is to shuffle the order of your trades and see what the drawdown would have been if the losses had come in a row. The Monte Carlo method does this thousands of times and shows a realistic range of drawdowns for your system, rather than one random value from history.
Where it's calculated
Ordo Trade shows maximum drawdown in money and percent on the dashboard, the current drawdown from the peak and the equity curve. Deposits and withdrawals are tracked separately and don't distort the picture. The strategy report includes a Monte Carlo check and “what if” scenarios.
In short: frequently asked questions
What is maximum drawdown?
The deepest fall in capital from a previous high over a period, in money or percent.
What drawdown is acceptable?
There is no universal threshold. What matters is that you can survive it financially and psychologically — and remember that a future drawdown may be deeper than the historical one.
How much do I need to earn after a 50% drawdown?
100%: from half the deposit you need to double to get back to the previous high.
