Maximum Drawdown

Maximum drawdown (MDD) is the largest peak-to-trough decline of a strategy’s equity curve over a given period — the worst loss an investor would have had to sit through. It is intuitive and tangible, which makes it a standard risk metric in backtest reporting and the denominator of the Calmar Ratio (annualised return ÷ maximum drawdown). Its main weakness is that it is a single extreme order statistic: it is highly sample-dependent — a longer or differently-windowed history almost always surfaces a larger worst loss — and it ignores the volatility, frequency and duration of smaller drawdowns. It is most useful when read alongside Sharpe-type and downside-deviation metrics rather than in isolation.

Connections

• Calmar Ratio — defines, source: https://en.wikipedia.org/wiki/Calmar_ratio
• Out-of-Sample Backtesting — relates, source: https://en.wikipedia.org/wiki/Calmar_ratio