Enter the peak value and trough value of a portfolio into the calculator to determine the maximum drawdown.

## Maximum Drawdown Formula

The following formula is used to calculate a maximum drawdown.

MD = (TV - PV) / PV *100
• Where MD is the maximum drawdown (%)
• TV is the trough value ($) • PV is the peak value ($)

## Maximum Drawdown Definition

Maximum Drawdown refers to the largest decline in the value of an investment or trading account from its peak value to its lowest point. It measures the extent of loss that an investment has experienced during a specific period.

Instead of focusing on the magnitude of gains, Maximum Drawdown assesses the risk and potential losses associated with an investment.

Investors and traders closely monitor Maximum Drawdown as it provides a crucial insight into the downside risk and volatility of an investment.

By analyzing the maximum decline, they can evaluate the potential loss they might face during adverse market conditions. This metric enables them to assess the level of risk they are comfortable with and make informed decisions about their investments.

Maximum Drawdown is particularly important because it helps investors understand the resilience and stability of an investment or trading strategy. It reveals the worst-case scenario regarding potential losses, allowing investors to prepare for potential downturns and adjust their investment strategies accordingly.

By considering the Maximum Drawdown, investors can set realistic expectations and align their risk tolerance with the potential losses they might incur.

## Example Problem

How to calculate a maximum drawdown?

1. First, determine the peak value.

For this example, a portfolio goes through a series of ups and downs during a 2-year long period. During that period, the maximum peak value it reaches is $500,000. 2. Next, determine the trough value. Over the same 2-year period, this portfolio reached a trough of$300,000.00.

3. Finally, calculate the maximum drawdown of this portfolio.

Using the formula above, the maximum drawdown is calculated to be:
MD = (TV – PV) / PV *100
MD = (300,000 – 500,000) / 500,000 *100
MD = -40%