Max DD: Maximum Drawdown
Also known as: max drawdown, peak-to-trough
What is it?
Maximum drawdown is the single largest drop from a high point to a low point that an account or strategy went through during a tested or live period. While ordinary drawdown can refer to any decline, maximum drawdown is the worst one on record, the deepest hole the account ever fell into before recovering. If a strategy's worst stretch took the account 35% below a previous high, then its maximum drawdown is 35%. This number is often called a survivability test, because it tells you the most pain the approach has historically demanded from a trader.
Knowing it helps you decide how much to risk: if you could not have stayed invested through that worst dip, the strategy is too aggressive for you regardless of its returns. The most important thing to understand is what this figure does not promise. Maximum drawdown is a historical or backtested measurement, a sample of what happened, not a ceiling on what can happen. Live markets can and sometimes do produce a deeper drawdown than anything seen before, so it is wise to assume the future worst case could exceed the historical one.
There is no risk-free approach to trading, past performance does not guarantee future results, and your capital is always at risk. Treat maximum drawdown as a planning input that should make your position sizing more cautious, not as a safety promise.
Why it matters: Max drawdown is the stress test of survivability: it tells you the deepest hole the strategy has historically dug.
Max drawdown = largest (peak - trough) / peak across the period
Max drawdown sets the survivability bar and should drive position sizing.
Real-world example
A strategy whose worst stretch took the account 35% below a prior high has a 35% maximum drawdown.
How SignalBots handles it
SignalBots reports maximum drawdown on performance pages so the worst historical stretch is clear up front. See /risk-warning.
Pro tip
Assume the future max drawdown can exceed the historical one, and size so even a worse run is survivable.
Common pitfalls
Treating historical max drawdown as a ceiling rather than a sample - live conditions can produce a deeper one.
Frequently asked questions
Can future drawdown exceed the historical maximum?
Yes. Past maximum drawdown is only what has happened so far. Live markets can produce a deeper one, so size with a margin of safety and never treat the figure as a guaranteed limit.
How is maximum drawdown different from regular drawdown?
Regular drawdown can describe any decline from a peak. Maximum drawdown is specifically the single deepest of all those declines over the period being measured.
Should I pick the strategy with the smallest max drawdown?
It is one important factor, but not the only one. A very low max drawdown might come from too few trades or an easy period. Weigh it against returns, trade count, and how the figure was measured.
Does a low maximum drawdown mean low risk?
Not on its own. It reflects past risk in a specific sample. Conditions outside that sample can be harsher, so a low historical figure is not a promise of low future risk. Capital is always at risk.
How should max drawdown affect my position size?
Use it to set sizing so that even a drawdown worse than the historical maximum stays within what you can financially and emotionally tolerate. Survivability should come before chasing returns.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.