Understanding Maximum Drawdown (MDD)

In algorithmic trading and investment portfolio management, Maximum Drawdown (MDD) measures the largest single drop from a portfolio's peak value to its lowest point (trough) before a new peak is achieved. It is a critical metric for assessing historical downside risk.

The mathematical formula for calculating this percentage is:

$$ Maximum\ Drawdown = \frac{Peak\ Value - Trough\ Value}{Peak\ Value} \times 100 $$

The Mathematics of Drawdown Recovery

One of the most dangerous psychological traps in trading is misunderstanding recovery math. Because your capital base shrinks during a drawdown, the percentage gain required to return to your previous peak is always larger than the percentage you lost.

A 10% drawdown requires an 11.1% gain to recover.
A 20% drawdown requires a 25% gain to recover.
A 50% drawdown requires a 100% gain to recover.

This calculator instantly computes the exact performance your trading algorithm needs to generate just to return to its high-water mark.