Max Drawdown Explained: Formula, Examples and Why It Matters
Max drawdown is the largest fall from a peak in account equity. The formula, worked examples, drawdown vs return, and how it breaks ties on PnL World.
Max drawdown (MDD) is the largest drop in account equity from a peak to a later low, before a new peak is reached. It answers a question return alone cannot: how much pain did it take to get this result?
The formula
Max drawdown = (trough equity − peak equity) ÷ peak equity
It is usually written as a negative percentage (−20%) or as a positive "drawdown of 20%".
Example
| Point | Equity |
|---|---|
| Start | 100,000 |
| Peak | 120,000 |
| Trough | 90,000 |
| End | 110,000 |
Max drawdown = (90,000 − 120,000) ÷ 120,000 = −25%.
Note that the drawdown is measured from the peak (120,000), not from the start. The account finished +10%, but at its worst it had lost a quarter of its value.
Drawdown vs return
Two traders finish a month at +10%:
- Trader A's equity never fell more than 4% from a high.
- Trader B fell 35% mid-month and recovered with a few large trades.
Same return, very different skill signal. Trader B's path means one more bad week could have ended the account. Drawdown shows how repeatable a result is likely to be.
Why drawdowns hurt more than they look
Losses compound against you. The deeper the drawdown, the larger the gain needed just to get back to the peak:
| Drawdown | Gain needed to recover |
|---|---|
| −10% | +11.1% |
| −20% | +25% |
| −33% | +50% |
| −50% | +100% |
| −80% | +400% |
Related measures
- Current drawdown — how far equity is below its latest peak right now.
- Drawdown duration — how long it took to recover to the previous peak.
- Return / max drawdown (sometimes called the Calmar or MAR ratio over long periods) — return per unit of worst-case pain.
How to keep drawdowns small
- Size by risk. Decide the % of equity you will lose if the stop is hit before you enter. See leverage in trading.
- Use stops. A stop-loss turns an open-ended loss into a planned one.
- Limit correlated positions. Long BTC, ETH and SOL at once is close to one big trade.
- Cut size after losses. Smaller trades during a drawdown slow the fall.
- Mind the open positions. Unrealized losses count in equity — and in drawdown.
How PnL World uses max drawdown
On PnL World, place = final result — the best return wins. Max drawdown has a specific job: it breaks ties.
- If two traders finish with the same result, the one with the smaller max drawdown ranks higher.
- If they are still level, the earlier entry ranks higher.
Drawdown is measured on result equity, which includes open positions at the mark price, fees and funding — so a loss held open still counts. Separately, a trader whom a liquidation leaves at 10% or less of the starting bankroll is marked Liquidated and ranks last.
Why not rank by a mix of return and drawdown? Because a combined formula can reward the wrong thing — for example, a bigger drawdown on a losing account can look "better" in some ratios. Ranking by result, with drawdown as the tie-break, keeps the winner obvious. More in how tournament results are scored.
FAQ
Is max drawdown measured on closed trades or on equity? Properly, on equity — including open positions. A drawdown on closed trades only can hide large open losses.
What is a good max drawdown? There is no single number; it depends on the period and strategy. Compare drawdown with return over the same period.
Can max drawdown be zero? Only if equity never fell below a previous high — for example, if no trades were made.
Does max drawdown reset? Max drawdown is the worst value over the whole period. Current drawdown resets every time equity makes a new high.
PnL World tournaments are simulated: trades are executed against live market data, but no real-money positions are opened on any exchange. Nothing here is financial advice.
Next: How tournament results are scored · What is PnL in trading? · Leverage in trading