Since max drawdown only measures the largest drawdown, it does not indicate the length of time it took an investor to be able to recover from their loss, including whether the investment recovered at all.

Maximum drawdown does take into consideration how often the portfolio experiences large losses. However, it’s crucial to keep in mind that, as the max drawdown formula suggests, this metric only measures the extent of the greatest loss in a portfolio.

There are different types of drawdown measures and maximum drawdown is the one that considers the greatest movement from a high position in a portfolio to a low spot in it before a new height is gained. MDD = (Trough Value - Peak Value) / Peak Value To illustrate the meaning of max drawdown better, let’s take a look at the max drawdown formula below. As a measure, maximum drawdown can be used on a standalone basis, or as an input with other metrics like the “Calmara Ratio” and “Return over Maximum Drawdown.” It is expressed as a percentage value. As an indicator, maximum drawdown looks at the downside risk over a certain period of time. But what does MDD signify? What Is Maximum Drawdown (MDD)?Ī maximum drawdown (MDD) -or max drawdown- is the most observed loss when the funds in a portfolio are measured from their peak to their trough, prior to a new peak forming. The term ‘MDD’ is often thrown around in the world of technical analysis compelling newcomers to wonder ‘what does MDD mean?’ MDD refers to maximum drawdown and falls under the purview of portfolio management. Typically drawdowns are quoted as percentage values between the initial peak and its subsequent trough. A decline from peak to trough in a trading account, investment portfolio or fund, is known as a drawdown.

Drawdown calculation in excel