Maximum Drawdown

beginner6 min read

The worst peak-to-trough fall — the number that decides whether you can actually stick with a strategy.

Maximum drawdown is the largest peak-to-trough decline your account (or a strategy) suffered over a period — the deepest the equity curve ever fell from a high before recovering. It’s the headline risk number, the counterweight to CAGR’s return.

Max drawdown matters more than almost any return figure because it measures the pain you must actually survive — emotionally and financially — to earn the return. A strategy’s CAGR is only real if you stick with it, and what makes people abandon a strategy (usually at the worst moment) is a drawdown deeper than they can stomach. A backtest showing 30% CAGR with a 60% max drawdown is, for most humans, untradeable — almost nobody holds through watching 60% of their money vanish; they capitulate near the bottom and never see the recovery. And the drawdown math is brutal (recall: −50% needs +100% to recover). So drawdown is the reality check on a strategy: it answers “could I genuinely live through this?” The best strategies aren’t the highest-return ones — they’re the ones with a return-to-pain ratio you can actually endure for years.

What it is — the worst peak-to-trough fall in the equity curve (e.g. a drop from ₹100 to ₹65 = a 35% max drawdown).
Why it rules — it sets the emotional and financial pain you must survive; exceed your tolerance and you’ll quit at the worst time.
The asymmetry — deep drawdowns need disproportionately large gains to recover (−50% → +100%).
The real test — a high CAGR with an unbearable drawdown is, in practice, untradeable.

ExampleTwo strategies both show 20% CAGR. Strategy A’s worst drawdown was 18%; Strategy B’s was 55%. On paper they “returned the same,” but almost no one survives B’s 55% plunge without bailing — so B’s 20% is largely theoretical. A’s gentler ride is the one a real human can actually hold to capture the 20%. Same return, very different tradability.

Key takeawayMaximum drawdown is the worst peak-to-trough fall — the pain you must survive to earn the return. It often matters more than CAGR, because an unbearable drawdown makes people quit at the bottom and the recovery math is brutal. The best strategy is one whose worst drawdown you can actually endure.

FAQs

What max drawdown is “acceptable”?

It’s personal — it depends on your emotional tolerance and financial situation, not a universal number. Many investors find drawdowns beyond ~20–30% extremely hard to hold through. The honest test: imagine *living* through the backtest’s worst drawdown with real money — if you’d have panic-sold, that strategy isn’t right for you regardless of its CAGR.