Drawdown measures a single consecutive loss from the highest point of equity to its lowest point, ending as soon as profit is earned. Maximum drawdown is defined as the largest measure of drawdown during a time period and/or since the creation of the strategy.

Larger maximum drawdowns likely signal a higher risk of losing capital.

Drawdown is updated every hour and calculated based on cumulative return changes; as cumulative returns are based on equity, drawdown calculations include closed and open orders.

The maximum drawdown formula

The max drawdown metric is generally calculated as such:

1. Drawdown 1 = (equity at the end of the drawdown 1 - equity before the drawdown 1)/equity before the drawdown 1
2. Drawdown 2 = (equity at the end of the drawdown 2 - equity before the drawdown 2)/equity before the drawdown 2
3. The maximum drawdown is obtained from the highest value between Drawdown 1 and Drawdown 2.

Example of maximum drawdown

The vertical metric shows strategy equity, while the horizontal metric shows the steps outlined below.

1. A strategy had a starting equity of 1000 USD.
2. The strategy provider profits 200 USD, so the equity is now 1200 USD.
3. The strategy provider withdraws 200 USD, setting equity to 1000 USD. Deposits, transfers, and withdrawals affect equity, but are never included in drawdown calculations.
4. The strategy provider incurs loss of 300 USD, so equity drops to 700 USD. This begins a drawdown movement.
5. The strategy provider incurs further loss of 500 USD; equity is now 200 USD while the drawdown continues.
6. The strategy provider earns 900 USD profit, bringing equity to 1100 USD.
7. The drawdown movement ended with equity at 200 USD, as the strategy experienced a profit from this amount. The first drawdown is calculated (200 USD - 1,000 USD) / 1,000 USD = -80%.
8. The strategy provider incurs a loss of 200 USD, bringing equity to 900 USD, beginning another drawdown movement.
9. The strategy provider incurs further loss of 300 USD, making equity 600 USD and continuing the drawdown.
10. The strategy provider earns 600 USD profit, bringing equity to 1,200 USD.

Again, profit ends the drawdown movement. The second drawdown is calculated 600 USD - 1,100 USD) / 1,100 USD = -45.45%.

The first drawdown was -80%, bigger than the 2nd drawdown of -45.45%. Therefore the maximum drawdown for this strategy is -80% during this time period.

As maximum drawdown is a percentage, it is limited to a maximum of -100%.