In plain English
What Maximum drawdown means
It captures the worst loss from a previous high before a new high is reached. This makes it a simple way to summarize the deepest historical setback in a return series. It is commonly used to compare strategies, but it says nothing about how long recovery took or how likely that loss was to occur.
Why it matters
Maximum drawdown gives a practical sense of the worst historical stress an account or strategy has experienced. That matters for capital planning, leverage decisions, and judging whether past volatility would have been tolerable.
Example
If a strategy climbs from 100 to 150 and later falls to 90 before recovering, the maximum drawdown over that span is 60 points, or 40% from the 150 peak. This is simplified and ignores cash flows.
Quick answers
Common questions
Is maximum drawdown always a percentage?+
It can be reported in percentage terms or in currency units, but percentage is usually easier for comparing different account sizes.
Does maximum drawdown tell you the average loss?+
No. It shows the single worst peak-to-trough decline in the chosen sample, not the typical loss.
Sources