In plain English
What Maximum drawdown means
Unlike a current drawdown, maximum drawdown looks backward over a defined history and selects the deepest decline. The result depends on the start date, end date, valuation frequency, and whether values are based on balance or equity. It is therefore a historical statistic, not a limit on future losses or a forecast of risk.
Why it matters
Maximum drawdown provides a concise way to describe the most severe observed account decline. It can help compare records with different return paths, but it cannot capture every risk: a short history may omit stressed markets, and a value calculated from daily snapshots may miss larger intraday declines.
Example
Over one period, account equity rises from $10,000 to $15,000, drops to $9,000, then ends at $14,000. The largest peak-to-trough fall is $6,000, from $15,000 to $9,000. Maximum drawdown is therefore 40% ($6,000 ÷ $15,000), even though the ending value is above the starting value.
Quick answers
Common questions
Can maximum drawdown change after the measurement period ends?+
Yes. Once new account values are added, a later and deeper peak-to-trough decline can replace the previously recorded maximum. A maximum drawdown should always identify the period covered.
Does maximum drawdown show how likely future losses are?+
No. It describes the worst decline observed in past data under a stated calculation method. Future market conditions, leverage, position sizes, and execution may produce smaller or larger declines.
Sources