Maximum drawdown: calculate a fall from a previous peak

Update the running peak before calculating a decline

The eight values are 100, 120, 108, 126, 94.5, 115, 130 and 117. They use a common unit, such as kronor in a fixed portfolio with no external cash flows. At 108, the highest previous level is 120. The decline is (108 − 120) / 120 = −10%.

The series reaches a new peak at 126, so drawdown is zero. Compare the next value, 94.5, with 126: (94.5 − 126) / 126 = −25%. After recovery to 115, the running peak is still 126. When the series later reaches 130, update the peak again. The final value, 117, is 10% below that new peak.

If the table does not fit, scroll it sideways.

A 25% maximum drawdown despite a positive ending

The largest decline in the table is 25%, from 126 to the later value 94.5. We state maximum drawdown as a positive loss magnitude, while ongoing declines in the table carry minus signs. Record the sign convention when comparing figures from different sources.

The start-to-finish return is instead (117 − 100) / 100 = +17%. Both answers can be correct: one describes the final result over the whole period, and the other describes the largest observed decline from a previous peak. A positive ending does not erase the downturn that occurred.

A later peak cannot precede an earlier trough

It is wrong to use 130 as the peak for the earlier trough of 94.5. At the time 94.5 is observed, 130 has not yet occurred. Selecting a series’ global maximum and minimum without checking their order creates a decline nobody followed through time.

The method only needs to track the highest value so far and compare each next observation with it. Deposits or withdrawals can change an account balance without the investments producing the same return. That requires data handling cash flows correctly; our series explicitly has none.

Document the interval you actually observe

The result applies to our eight observations and chosen start. Monthly measurements may miss larger declines between month ends. Changing the period can change both the peak and maximum drawdown. Record the time period, observation frequency and whether the series represents price or total return.

Historical maximum drawdown does not cap future losses. It describes an event in past data. Use the figure with a correct explanation, then continue with the recovery lesson to calculate the rise needed after a fall. Investiq’s portfolio guide is a practical continuation; this manual measure does not promise a drawdown feature in the app.