Maximum drawdown
The maximum drawdown is the largest decline suffered by the equity curve from a peak to the subsequent trough, expressed as a percentage of capital.
The maximum drawdown measures the worst stretch an account has been through: the gap between the highest point reached by the equity curve and the deepest trough that followed, before a new high was set. A 25% maximum drawdown means that at some point during the test, capital had shrunk by a quarter from its peak. It is the most tangible risk metric in a backtest, because it is the one you actually live through: nobody feels a standard deviation, everybody feels a 25% loss.
Why it is a central metric
Drawdown arithmetic is asymmetric: after −20%, you need +25% to get back to break-even; after −50%, you need +100%. A deep drawdown therefore threatens the very survival of the strategy, and of the trader's discipline, often abandoned at the worst possible moment. The maximum drawdown also helps calibrate position sizing: the higher it is in backtests, the more conservative per-trade exposure should remain. In Screener.Trading, the backtest displays the strategy's maximum drawdown and the equity curve that locates it in time.
A backtest's maximum drawdown is a historical minimum, not a ceiling: the future can produce worse. Build a safety margin into your risk management.
Keep exploring
- FeatureThe backtesting tool built into your screenersBacktests built from your screeners: entries, exits, fees and full metrics to judge a strategy on numbers instead of gut feeling.
- GlossaryEquity curveThe equity curve plots the evolution of a strategy's capital trade after trade, and its shape often says more than any aggregate metric.
- GlossaryPosition sizingPosition sizing is the share of capital committed to a trade, calibrated so that the loss if the stop is hit remains a controlled fraction of the account.
- GlossarySharpe ratioThe Sharpe ratio measures a strategy's risk-adjusted return, by dividing its excess performance by the volatility of its returns.
- GuideBacktesting a trading strategy, step by stepBefore risking a cent, replay your strategy on historical data: backtest setup, reading the key metrics, and the traps of over-optimization.