How to Calculate Portfolio Drawdown

Your return tells you where you ended up. Your drawdown tells you what you had to survive to get there. Two traders can finish the year up 20 percent, and one of them nearly quit in March when the account was down 35 percent from its high. The final number hides that. The drawdown does not.

Drawdown is the risk metric most retail traders skip, and it is the one that best predicts whether they stick around long enough to compound. This guide shows you how to calculate it correctly, how portfolio-level drawdown differs from the drawdown inside a single trade, and how to read the number once you have it.

• Drawdown is the decline from a peak in account value to a later low, expressed as a percentage.
• Maximum drawdown (MDD) is the deepest of those declines over a period, and it reads differently from average drawdown.
• Calculate it from an equity curve, not from a single trade.
• Portfolio drawdown and per-trade drawdown are different measurements that answer different questions.
• Recovery is asymmetric: a 50 percent drawdown needs a 100 percent gain to break even.

What drawdown actually measures

A drawdown is the decline from a portfolio's cumulative peak value to a subsequent trough, expressed as a percentage. Maximum drawdown is the largest such decline over the observation period. This is the standard definition used across performance measurement, and the CFA Institute has written about it as a portfolio-shaping constraint, not just an after-the-fact statistic.

The formula for a single drawdown is simple:

Drawdown = (Trough Value - Peak Value) / Peak Value

Multiply by 100 to get a percentage. If your account peaked at 100,000 and fell to 75,000, the drawdown is (75,000 - 100,000) / 100,000 = -25 percent.

Drawdown matters more than volatility for most traders because it measures pain in the currency you actually feel: how far below your best-ever balance you are sitting right now. Standard deviation treats an upside surprise and a downside collapse as the same thing. Drawdown only counts the collapse. That is why drawdown analysis originated in managed futures and hedge fund evaluation, where the standard risk measures understated the real experience of a large loss.

How to calculate maximum drawdown, step by step

Maximum drawdown is not the difference between your all-time high and your all-time low. It is the deepest peak-to-trough decline anywhere in your equity curve, and finding it takes four steps.

1. Build the equity curve. Record your total account value at regular intervals: daily, or after every closed trade. This is the series you will measure against.
2. Track the running peak. At each point, note the highest value seen so far, the running high-water mark. It never goes down; it only ratchets up when you set a new high.
3. Compute the drawdown at each point. For every observation, calculate (Current Value - Running Peak) / Running Peak. When you are at a new high, this is zero. When you are below the peak, it is negative.
4. Take the minimum. The most negative value in that series is your maximum drawdown.

Here is the four-step logic as a picture:

Notice what the picture shows: the account made a new high, fell sharply, recovered, and eventually climbed well past the old peak. The maximum drawdown is measured against that earlier peak, not against the final value. Even a portfolio that ends the period at an all-time high can have a large maximum drawdown buried in the middle.

A concrete example from institutional data makes it clear. In one worked calculation from Wall Street Prep, a fund peaked at 200 million and fell to a trough of 120 million, giving (120 - 200) / 200 = -40 percent maximum drawdown. The same arithmetic works whether your account is 200 million or 2,000 dollars.

Portfolio drawdown is not the same as per-trade drawdown

This is the distinction that trips up most traders, and it is the reason the same word can mean two different things depending on who is using it.

Per-trade drawdown (sometimes called maximum adverse excursion) measures how far a single position moved against you before you closed it. You bought at 50, the price dipped to 44 before recovering, and you sold at 55. The trade was a winner, but it had an intra-trade drawdown of 12 percent. This is a trade-management metric. It tells you whether your stops are too tight, whether you are sitting through more heat than your plan allows, and how much unrealized pain each setup typically involves.

Portfolio drawdown (equity drawdown) measures your total account value against its own peak, across all trades and cash combined. It does not care about any single position. It cares about the sum. You can have a portfolio drawdown even when every open trade is green, if you booked a string of realized losses. And you can have every open position underwater while your portfolio drawdown stays small, because closed profits and cash cushion the account.

The two answer different questions:

When someone says "my max drawdown is 18 percent," ask which one they mean. For judging survival and position sizing, you want portfolio-level equity drawdown. For tuning individual setups, you want per-trade adverse excursion. Both are useful. They are not interchangeable, and reporting one when the reader assumes the other is how people talk past each other about risk. Once you have a clean equity curve, portfolio drawdown falls out of the same data you use to track your portfolio performance over time.

Why depth alone is not the whole story

Maximum drawdown reports one number: the depth of the worst decline. It says nothing about how long you spent underwater or how long recovery took. That is its central limitation.

A 25 percent drawdown that recovers in two months and a 25 percent drawdown that takes three years to recover produce the identical maximum drawdown figure. The lived experience could not be more different. The three-year version ties up your capital, imposes an opportunity cost, and tests your patience far more severely. Two metrics fix this blind spot:

• Drawdown duration (the underwater period): the total time from the peak until your account first exceeds that peak again. Many allocators now report maximum drawdown and maximum drawdown duration side by side as standard practice.
• Average drawdown: the mean depth across every drawdown episode, not just the worst one. A strategy whose average drawdown is close to its maximum behaves very differently from one where the maximum was a single outlier.

If you want to distinguish a strategy with one ugly outlier from one that grinds you down constantly, you have to look past the single worst number. That is a full topic on its own, and it deserves its own treatment when you are comparing systems rather than just measuring one account.

Reading the number: the recovery math traders underestimate

The most important thing to understand about drawdown is that it is asymmetric. The gain required to recover is always larger than the loss that put you there, and the gap widens fast as the hole gets deeper.

The formula is:

Required gain = (1 / (1 - drawdown)) - 1

Run it across a few levels and the problem becomes obvious:

• A 10 percent drawdown needs an 11.1 percent gain to break even.
• A 20 percent drawdown needs a 25 percent gain.
• A 25 percent drawdown needs a 33.3 percent gain.
• A 50 percent drawdown needs a 100 percent gain.
• An 80 percent drawdown needs a 400 percent gain.

The reason is arithmetic, not psychology. After losing 50 percent, your account is half its original size, so a 100 percent gain on that smaller base is what it takes to double back to where you started. This is standard, verifiable math, and the Bogleheads wiki lays out the percentage gain and loss relationship in full.

The practical takeaway: keeping drawdowns shallow is worth more than it looks. Cutting your maximum drawdown from 40 percent to 20 percent does not just halve the pain, it turns a required 66.7 percent recovery into a 25 percent one. This is why fees, slippage, and small persistent leaks matter so much over time. Every cost deepens the hole you have to climb out of, which is the direct connection between drawdown control and understanding why simple return is misleading when you judge performance.

Putting drawdown into a risk-adjusted score

Once you have maximum drawdown, you can combine it with return to judge whether the reward justified the risk. The most common drawdown-based ratio is the Calmar ratio: annualized return divided by maximum drawdown. It tells you how much return a strategy generated per unit of its worst peak-to-trough loss. The measure was created in 1991 by Terry Young for the California Managed Accounts Reports newsletter, specifically to evaluate managed futures funds where drawdown is the risk investors care about most.

A higher Calmar ratio means better risk-adjusted performance. A strategy that returned 20 percent with a 10 percent maximum drawdown (Calmar of 2.0) treated your capital more gently than one that returned 20 percent with a 40 percent drawdown (Calmar of 0.5), even though both show the same headline return. Drawdown sits alongside a handful of other core measures worth watching, which we cover in our roundup of essential trading metrics.

Frequently Asked Questions

What is a good maximum drawdown?

There is no universal threshold, because it depends on your strategy, timeframe, and tolerance. The more useful frame is the recovery math: a drawdown you can recover from with a plausible gain is manageable, and one that requires an unrealistic gain is dangerous. A 20 percent drawdown (needing a 25 percent recovery) is a very different situation from a 50 percent drawdown (needing 100 percent). Judge the number against what it takes to climb back, not against an arbitrary limit.

How is maximum drawdown different from volatility?

Volatility (standard deviation) treats upside and downside moves the same and measures dispersion around an average. Maximum drawdown only counts downside, and it measures the deepest cumulative decline from a peak. Two portfolios can have identical volatility while one has a far worse maximum drawdown. For traders who care about surviving bad stretches, drawdown usually describes the real risk better.

Do I calculate drawdown on realized or unrealized value?

Portfolio drawdown uses your total account value, which includes both realized results and the current mark-to-market value of open positions plus cash. If you only measure closed trades, you understate the drawdown you actually lived through, because open positions can be deeply underwater before you close them. Mark the whole account to build an honest equity curve.

How often should I measure drawdown?

For most active traders, a daily equity snapshot is enough to catch the true peak-to-trough decline. Measuring only monthly can hide an intra-month low that you actually experienced. If you trade intraday and size aggressively, you may want finer granularity, but daily is the practical default.

Can drawdown ever be positive?

No. Drawdown is zero when you are at a new high, and negative (or expressed as a positive percentage of decline) whenever you are below your running peak. It never shows a gain, because by definition it only measures the distance below your best-ever value.

Final Thoughts

Return is the number you show people. Drawdown is the number that decides whether you are still trading in two years. Calculate it from a full equity curve, keep portfolio-level drawdown separate from the heat inside individual trades, and always read the depth alongside the recovery math and the time spent underwater. A shallow drawdown is not a modest achievement. It is the thing that lets compounding do its work, because you never have to dig out of a hole that arithmetic makes nearly impossible to escape.

If you keep an honest record of your account value over time, portfolio drawdown is something your journal can surface automatically rather than something you reconstruct by hand. TradeReveal computes drawdown as part of its free performance analytics from the trades and positions you log, so the number is there whenever you want to check how deep the last hole went.

Sources

• CFA Institute: Sculpting Investment Portfolios: Maximum Drawdown and Optimal Portfolio Strategy
• Wall Street Prep: Maximum Drawdown (MDD) Formula and Calculator
• Bogleheads Wiki: Percentage gain and loss
• AnalystPrep (CFA Level III): Capture Ratios and Drawdowns in Manager Evaluation
• Wikipedia: Calmar ratio

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The TradeReveal Team