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Risk Metric
Max Drawdown
Maximum Drawdown (MDD)
Definition
The maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. It measures the worst-case scenario for an investor who bought at the peak.
Formula
(Trough Value - Peak Value) / Peak Value
Good
> -20%
Bad
< -40%
Example
If your portfolio peaked at €50,000 and then dropped to €32,000, your max drawdown is (32,000 - 50,000) / 50,000 = -36%. This means you would have experienced a 36% loss from peak.