Maximum drawdown (MDD) is the largest peak-to-trough decline in a trading account’s equity over a specified time period. It represents the worst-case scenario your account has experienced — the single deepest hole you’ve had to climb out of. MDD is arguably the most important risk metric in trading because it determines whether you can survive your worst losing streak.
How to Calculate Maximum Drawdown
MDD = (Peak Equity - Lowest Trough) / Peak Equity × 100
Example
Your equity over 6 months:
| Month | Equity | Peak | Current Drawdown |
|---|---|---|---|
| Jan | $10,000 | $10,000 | 0% |
| Feb | $11,200 | $11,200 | 0% |
| Mar | $10,400 | $11,200 | -7.1% |
| Apr | $9,800 | $11,200 | -12.5% |
| May | $10,600 | $11,200 | -5.4% |
| Jun | $11,500 | $11,500 | 0% |
Maximum drawdown: 12.5% (from $11,200 peak to $9,800 trough in April)
MDD vs. Other Drawdown Metrics
| Metric | What It Measures |
|---|---|
| Current drawdown | How far you are from peak equity right now |
| Maximum drawdown | The largest-ever peak-to-trough decline |
| Average drawdown | The mean of all drawdown periods |
| Drawdown duration | How long each drawdown period lasts |
MDD is the single number that tells you the worst your account has endured. If you can accept your maximum drawdown psychologically and financially, your risk management is likely appropriate.
The Recovery Problem
The reason maximum drawdown matters so much is that recovery is nonlinear:
| MDD | Recovery Needed | Difficulty |
|---|---|---|
| 5% | 5.3% | Routine |
| 10% | 11.1% | Normal |
| 15% | 17.6% | Manageable |
| 20% | 25.0% | Challenging |
| 30% | 42.9% | Very difficult |
| 50% | 100.0% | Nearly impossible |
A 50% maximum drawdown means you need to double your remaining capital to get back to your peak. At that point, most traders abandon the strategy — or worse, increase risk trying to recover.
MDD in Prop Firm Trading
Maximum drawdown limits are the primary rule of prop firm trading. Most funded account programs enforce:
- Daily MDD: 4-5% maximum loss per day
- Overall MDD: 8-12% from starting balance or highest equity
- Trailing MDD: Some firms use a trailing maximum drawdown that follows your peak equity upward
Breaching any of these limits results in immediate account termination. This makes MDD tracking the single most important discipline for funded traders.
Managing Maximum Drawdown
- Set a personal MDD limit — Before trading, define your maximum acceptable drawdown (e.g., 15%). If you reach it, stop and review.
- Use consistent position sizing — Erratic position sizes lead to unpredictable drawdowns
- Reduce risk during drawdown — Cut position size by 50% when drawdown exceeds 10%
- Track daily — Monitor your drawdown from peak equity every day
Tracking MDD in Your Journal
Your journal should track:
- Current MDD — Your all-time maximum drawdown
- MDD by strategy — Which approaches produce the deepest drawdowns
- MDD by pair — Which currency pairs contribute most to peak drawdowns
- Drawdown recovery time — How long it takes to recover from each drawdown period
- MDD proximity alerts — Warnings when approaching your personal or prop firm limit
PipJournal tracks your maximum drawdown in real-time, alerts you when approaching critical levels, and identifies which behaviors and pairs contribute most to your deepest declines.
