Max Drawdown Formula: How to Calculate Maximum Drawdown Step by Step

Q: What is the max drawdown formula?

Max drawdown is calculated as MDD = (Trough Value - Peak Value) / Peak Value, where the peak is the highest value reached before the drop and the trough is the lowest value reached after that peak and before a new peak. The result is expressed as a negative percentage.

What You'll Learn

The exact max drawdown formula and what each variable means
A step-by-step calculation on a realistic equity curve
Historical max drawdowns for S&P 500, 60/40, Nasdaq, and Bitcoin
Recovery time and the relationship between drawdown depth and recovery years
Why max drawdown is one of the most important real-world risk metrics

What Is Maximum Drawdown?

Maximum drawdown (MDD) is the largest peak-to-trough decline in a portfolio's value over a given measurement period, expressed as a percentage. Unlike standard deviation, which measures the typical range of returns, max drawdown measures the worst observed loss from a previous high.

It is the metric that captures what investors actually experience emotionally and financially: how far the portfolio fell from its previous high before it recovered. A portfolio with low volatility but one catastrophic decline can have a worse max drawdown than a volatile portfolio that never falls deeply.

The Max Drawdown Formula

Single Peak-to-Trough Drawdown

Drawdown at a Point in Time

DD_t = (V_t − V_peak) / V_peak

Drawdown at time t is the percentage change from the running peak to the current value. Always ≤ 0.

Maximum Drawdown

Max Drawdown over a Period

MDD = min_t [ (V_t − V_peak,t) / V_peak,t ]

The minimum (most negative) drawdown observed over the entire period.

V_t	Portfolio value at time t
V_peak,t	Running maximum portfolio value up to and including time t
DD_t	Drawdown at time t (always zero or negative)
MDD	Maximum drawdown over the measurement period

Why "running peak" matters

The peak is not fixed at the start of the period. As the portfolio reaches new highs, the running peak updates. A drawdown is always measured from the most recent peak, not the original starting value. This is why a portfolio that doubles and then loses 20 percent has a -20 percent drawdown, not a gain.

How to Calculate Max Drawdown: Step-by-Step Example

Example: Calculating MDD on a $200,000 Portfolio

1 Record month-end portfolio values

Jan: $200,000 · Feb: $215,000 · Mar: $230,000 (peak)

Apr: $205,000 · May: $175,000 · Jun: $161,000 (trough)

Jul: $185,000 · Aug: $210,000 · Sep: $235,000 (new peak)

2 Track the running peak at each month

Jan: $200K · Feb: $215K · Mar: $230K (peak) · Apr: $230K · May: $230K · Jun: $230K · Jul: $230K · Aug: $230K · Sep: $235K (new peak)

3 Compute drawdown at each month

Jan: 0% · Feb: 0% · Mar: 0% (at peak)

Apr: (205−230)/230 = -10.9%

May: (175−230)/230 = -23.9%

Jun: (161−230)/230 = -30.0% (worst point)

Jul: (185−230)/230 = -19.6% · Aug: -8.7% · Sep: 0% (recovered)

4 Identify the minimum

The most negative drawdown across all months is -30.0% in June.

Max Drawdown = -30.0%

5 Compute recovery time

Peak occurred in March. Portfolio returned to the prior peak in September.

Recovery time = 6 months from trough back to prior peak, or 9 months peak-to-peak round-trip.

Drawdown Visualized

Equity Curve and Underwater Plot

Portfolio value

Underwater (drawdown)

Prior peak

Historical Max Drawdowns by Asset

Max drawdown depends heavily on what you hold. Approximate worst peak-to-trough declines for major asset classes over the last 25 years:

Asset	Worst Max Drawdown	Period	Recovery Time
S&P 500 (Total Return)	-55%	Oct 2007 to Mar 2009	~3.0 years
S&P 500 (Total Return)	-34%	Feb 2020 to Mar 2020	~5 months
Nasdaq 100	-78%	Mar 2000 to Oct 2002	~15 years
60/40 Stock/Bond	-30%	2008-2009	~2 years
60/40 Stock/Bond	-21%	2022	~1.5 years
Long Treasury (TLT)	-50%	Aug 2020 to Oct 2023	Still recovering
Bitcoin	-83%	Dec 2017 to Dec 2018	~3 years
Bitcoin	-77%	Nov 2021 to Nov 2022	~2 years

The 50 percent rule

A 50 percent drawdown requires a 100 percent gain to recover. A 80 percent drawdown requires a 400 percent gain. Recovery math is asymmetric and gets brutal beyond -50 percent, which is why max drawdown matters more than typical volatility for long-term outcomes.

Drawdown Depth vs Recovery Time

The percentage gain required to recover from a drawdown grows nonlinearly:

Drawdown	Gain Required to Recover	Years at 8% Annual Return
-10%	+11.1%	~1.4 years
-20%	+25.0%	~2.9 years
-30%	+42.9%	~4.6 years
-40%	+66.7%	~6.6 years
-50%	+100.0%	~9.0 years
-70%	+233.3%	~15.6 years
-80%	+400.0%	~20.9 years

How Guardfolio Tracks Max Drawdown Automatically

Guardfolio connects to your brokerage accounts (read-only) and computes running max drawdown across all your holdings, refreshed continuously. It also surfaces drawdown-related risk signals alongside volatility, concentration, and correlation-break alerts.

The free portfolio risk report takes about 2 minutes, requires no account, and includes:

Current drawdown from the all-time portfolio peak
Max drawdown over multiple windows (1Y, 3Y, 5Y, all-time)
Time underwater (days since last peak)
Per-holding drawdown contribution (which positions are pulling the portfolio down)

Frequently Asked Questions

What is the max drawdown formula?

Max drawdown is calculated as MDD = (Trough Value − Peak Value) / Peak Value, where the peak is the highest value reached before the drop and the trough is the lowest value reached after that peak and before a new peak. The result is expressed as a negative percentage.

How do you calculate maximum drawdown?

Identify the running peak (highest cumulative portfolio value up to each point in time), compute the drawdown at every point as (Current Value − Running Peak) / Running Peak, and take the minimum value of that series. That minimum is the maximum drawdown.

What is a good max drawdown?

Context matters. The S&P 500 has had max drawdowns of about -55% (2008) and -34% (2020). A balanced 60/40 portfolio typically experiences -20% to -30% in major bear markets. A max drawdown deeper than the broad market suggests concentration or excess risk. Shallower drawdowns suggest more conservative positioning.

What is the difference between drawdown and max drawdown?

Drawdown is the percentage decline from any prior peak at a single point in time. Max drawdown is the largest such decline over the entire measurement period. A portfolio can have many drawdowns; it has only one max drawdown per measured window.

What is drawdown recovery time?

Recovery time (also called the recovery period or underwater period) is the number of trading days or months from the trough back to the previous peak. The S&P 500 took about 5.5 years to recover from the 2007 peak after the 2008-2009 crash, but only about 5 months to recover from the 2020 COVID drawdown.

How is max drawdown different from Value at Risk (VaR)?

VaR is a forward-looking statistical estimate: "with 95% confidence, the portfolio will not lose more than X% in one day." Max drawdown is a backward-looking measurement of the worst loss that actually happened. VaR uses assumptions; max drawdown uses history. Most risk frameworks use both.

Can max drawdown be calculated in real time?

Yes. Modern portfolio monitoring tools update the running peak continuously and recalculate the current drawdown after each price update. Real-time MDD tracking lets investors know exactly how far the portfolio is from its prior peak at any moment, rather than waiting for an end-of-period statement.

Max Drawdown Formula