Glossary

Maximum Drawdown — Definition, Formula, and Window Sensitivity

Maximum drawdown is the largest peak-to-trough decline in a portfolio's value. Definition, formula, worked example, and why extending history monotonically increases it.

By NakedPnL Research·May 7, 2026·4 min read

TL;DR

Maximum drawdown is the largest percentage decline from a running NAV peak to a subsequent trough.
It is a non-decreasing function of the lookback window — adding more history can only equal or increase the figure.
NakedPnL doesn't display max drawdown on profile pages because a single-event metric is incentive-incompatible on a public registry.

Definition

Maximum drawdown (MDD) is the largest percentage decline in the value of a portfolio measured from a previous all-time-high (the running peak) to a subsequent low (the trough), computed over a specified measurement window. It is a path-dependent statistic: it depends on the actual sequence of NAV observations, not on the distribution of returns.

Formula

MDD = max_{t in window} ( (peak_t - NAV_t) / peak_t )

where:
  peak_t = max(NAV_s for s <= t)
  NAV_t  = portfolio value at time t

MDD is reported as a non-negative percentage; some sources prefer the signed form -MDD.

The drawdown duration (time from peak to recovery) is a separate, equally informative statistic.

Worked example

A portfolio's daily NAVs over a five-day window are 100, 110, 105, 92, 98. The running peaks are 100, 110, 110, 110, 110. The drawdowns are 0%, 0%, 4.55%, 16.36%, 10.91%. Maximum drawdown over this window is therefore 16.36% (peak 110 to trough 92). Add a sixth day with NAV = 80 and MDD jumps to (110 − 80) / 110 = 27.27% — the figure grows monotonically as the window is extended.

Why NakedPnL doesn't display this on profile pages

Maximum drawdown has two structural weaknesses for use as a public summary statistic. First, it is monotonic in the lookback window: every additional day of history can only equal or increase the figure, which means a trader with a long honest track record will always look 'worse' than a newer trader who has not yet experienced a tail event. Second, it is dominated by a single observation, so one anomalous day can determine the entire summary. Both properties mean that a publicly-displayed MDD invites optimisation — managers can shorten the visible window or steer around a known measurement boundary. NakedPnL therefore restricts profile-level metrics to TWR, total PnL, and trade count, which integrate honestly over the full chained history. The full daily NAV series is exposed via the API for allocators who want to compute drawdown statistics with their own window choices.

Drawdown duration — time from peak to recovery
Calmar ratio — annualised return divided by MDD
Underwater curve — drawdown plotted against time
Tail risk

Frequently asked questions

Is maximum drawdown the same as the worst loss?

No. The worst single-period loss is a one-step return. Maximum drawdown can span many periods of compounding decline; it measures from the most recent NAV peak rather than from yesterday's close.

Can MDD be greater than 100%?

Not for unlevered portfolios where NAV cannot go below zero. Levered or margined accounts can post a 100%+ paper loss against the high-water mark in some accounting conventions, but the practical bound on a fully-funded brokerage account is 100%.

How is recovery from drawdown typically measured?

Time to recovery is the number of trading days from the trough back to the prior NAV peak. Combined with MDD itself it is the standard pair of statistics for characterising a portfolio's worst experience.

References

Drawdown (economics) — Wikipedia