Max drawdown (MDD) is the worst peak-to-trough drop your equity curve suffers before a new high is made.
Think of it as the deepest hole you fell into along the way. It’s computed on cumulative equity (or account balance), not on a single trade, and it’s expressed as a percentage. Because it focuses on downside only, traders use it as a quick proxy for “how painful did this strategy get?” over a given window.
The simple math behind it
At any time, track your running high-water mark. Drawdown at time t is the distance from that peak to current equity. Max drawdown is the largest of those distances in your sample. In code or a spreadsheet, you update the peak when a new high occurs and compute percentage drops from that peak. MDD is the maximum of those. It’s simple, transparent, and reproducible. Your personal MDD depends on entry/exit rules, leverage, and discipline – not on the ticker alone.
Why day traders should care
Drawdowns compound fast because losses and gains are asymmetric: lose 20% and you need 25% to get back; lose 50% and you need 100%. That recovery math is why unmanaged losing streaks wreck otherwise decent systems. MDD tells you the psychological and financial pain required to stick with a plan, and whether your position sizing matches your tolerance.
Intraday vs. end-of-day drawdown
For day traders, it helps to track two views: intraday equity drawdown (including open P&L swings) and closed-trade drawdown (end-of-day or after each exit). Intraday tracking captures heat you took while positions were open, closed-trade tracking shows realized damage. Both use the same mechanics – peak-to-trough on your equity curve, but answer different questions about risk and stress.
MDD versus daily loss limits
MDD is historical: the worst hole so far. Daily loss limits are operational, a rule that stops you trading for the session once you’re down a set amount (e.g., 1–3% of account). Prop firms formalize this with daily loss and overall drawdown rules – breach them and you’re flat for the day or the account is closed. Adopting similar guardrails in a personal account preserves capital and discipline.
Pair MDD with better context
MDD alone ignores how long you stayed underwater and how often drawdowns occur. Risk-adjusted metrics bring context. The Calmar (or MAR) ratio divides CAGR by max drawdown – higher is better for a given pain level. The Ulcer Index goes further by folding in depth and duration of declines, capturing how prolonged the pain was. Using these with MDD gives a fuller picture of strategy “comfort.”
Practical guardrails you can apply today
Write MDD boundaries into your plan: a max daily loss, a weekly stop (pause after a preset drawdown or three consecutive losses), and per-trade risk that keeps worst-case daily heat tolerable. Re-scale size when your equity falls so one bad day can’t snowball into a fatal spiral. Track MDD alongside win rate, expectancy, and slippage, and review after meaningful sample sizes – not after a handful of trades.
The takeaway
Max drawdown is the clearest snapshot of downside pain. Measure it on your own equity curve, monitor how quickly you recover, and size positions so your planned drawdown is survivable without breaking rules or psychology. Treat MDD as a budget for mistake. Protect it with daily stops, avoid revenge sizing during losing streaks, and let risk-adjusted metrics tell you whether returns are worth the ride.