Maximum Drawdown Calculator
This tool calculates the Maximum Drawdown (MDD) for a sequence of investment values over time. The MDD is the largest peak-to-trough decline during a specific period.
Enter a list of numerical values representing your investment's value at different points in time (e.g., daily closing prices, weekly portfolio values). Values can be separated by commas, spaces, or newlines.
Enter Investment Values
Understanding Maximum Drawdown (MDD)
What is Maximum Drawdown?
Maximum Drawdown (MDD) is a key risk metric used to measure the largest single drop from a peak to a trough in the value of an investment or portfolio before a new peak is attained. It represents the maximum loss an investor would have suffered if they invested at the peak and sold at the subsequent trough.
Why is MDD Important?
MDD provides insight into the downside risk of an investment. A high MDD indicates that the investment has experienced significant price declines, which can be emotionally challenging for investors and may require a substantial gain just to break even from the lowest point of the drawdown.
How is MDD Calculated?
The calculation involves tracking the peak value seen so far and calculating the decline from that peak whenever the value drops. The largest of these declines (either in absolute terms or as a percentage of the peak) is the Maximum Drawdown.
Algorithm Overview:
- Start with the first value as the initial peak and current value.
- Iterate through the remaining values.
- If the current value is higher than the recorded peak, update the peak to the current value.
- If the current value is lower than the recorded peak, calculate the difference (drawdown) from the peak to the current value.
- Keep track of the largest drawdown encountered during the iteration.
- The Maximum Drawdown is the largest difference recorded. Percentage MDD is this difference divided by the peak from which it dropped, multiplied by 100.
Examples
Click on an example to see the input values and the calculated Maximum Drawdown:
Example 1: Simple Decline
Scenario: An investment starts at 100 and drops to 80.
Input Values: 100, 80
Calculation: Peak is 100. Current value 80. Drawdown = 100 - 80 = 20. Percentage = (20 / 100) * 100 = 20%.
Result: Absolute MDD = 20, Percentage MDD = 20%.
Example 2: Peak and Recovery
Scenario: Investment goes up, drops significantly, then recovers partially.
Input Values: 100, 120, 90, 110
Calculation:
- Start: Value 100. Peak = 100. MDD = 0.
- Value 120: New peak = 120. MDD = 0.
- Value 90: Drop from peak 120. Drawdown = 120 - 90 = 30. Percentage = (30 / 120) * 100 = 25%. Current Max Drawdown = 30 (25%).
- Value 110: Rises, but not above the peak of 120. No new peak. Current drawdown from 120 is 120 - 110 = 10 (which is less than 30). Max Drawdown remains 30 (25%).
Result: Absolute MDD = 30, Percentage MDD = 25%.
Example 3: Multiple Peaks and Troughs
Scenario: A more volatile sequence with ups and downs.
Input Values: 100, 110, 105, 120, 115, 130, 90, 100, 140
Calculation: The largest drop from a preceding peak occurs after the peak of 130, dropping to 90. Drawdown = 130 - 90 = 40. Percentage = (40 / 130) * 100 ≈ 30.77%.
Result: Absolute MDD = 40, Percentage MDD ≈ 30.77%.
Example 4: Value Drops to Zero
Scenario: Investment loses all its value after reaching a peak.
Input Values: 50, 75, 100, 50, 10, 0
Calculation: Peak reaches 100. The value then drops to 0. Drawdown = 100 - 0 = 100. Percentage = (100 / 100) * 100 = 100%.
Result: Absolute MDD = 100, Percentage MDD = 100%.
Example 5: Only Increasing Values
Scenario: Investment value continuously increases.
Input Values: 100, 110, 120, 130, 140
Calculation: The value only goes up. No drop from any peak occurs.
Result: Absolute MDD = 0, Percentage MDD = 0%.
Example 6: Starting with a Drop
Scenario: Investment value immediately drops from the start.
Input Values: 150, 120, 115, 100
Calculation: Initial peak is 150. The lowest point reached is 100. Drawdown = 150 - 100 = 50. Percentage = (50 / 150) * 100 ≈ 33.33%.
Result: Absolute MDD = 50, Percentage MDD ≈ 33.33%.
Example 7: Small Values
Scenario: Tracking something with small value fluctuations.
Input Values: 0.5, 0.6, 0.55, 0.65, 0.4
Calculation: Peak reaches 0.65. Lowest point after that is 0.4. Drawdown = 0.65 - 0.4 = 0.25. Percentage = (0.25 / 0.65) * 100 ≈ 38.46%.
Result: Absolute MDD = 0.25, Percentage MDD ≈ 38.46%.
Example 8: Negative Values (e.g., P/L)
Scenario: Tracking Profit/Loss where values can be negative.
Input Values: -100, -50, 0, 50, -20, 10
Calculation: Peak reaches 50. Lowest point after that is -20. Drawdown = 50 - (-20) = 50 + 20 = 70. Percentage = (70 / 50) * 100 = 140%.
Result: Absolute MDD = 70, Percentage MDD = 140%.
Example 9: Flat Period Followed by Drop
Scenario: Value stays flat then drops.
Input Values: 200, 200, 200, 180, 170
Calculation: Peak remains at 200. Lowest point is 170. Drawdown = 200 - 170 = 30. Percentage = (30 / 200) * 100 = 15%.
Result: Absolute MDD = 30, Percentage MDD = 15%.
Example 10: Percentage MDD from Peak 100
Scenario: Starting at 100 for easy percentage calculation.
Input Values: 100, 110, 100, 90, 105, 80, 95, 120
Calculation: Peak reaches 120. The lowest point after that peak is 80. Drawdown = 120 - 80 = 40. Percentage = (40 / 120) * 100 ≈ 33.33%.
Result: Absolute MDD = 40, Percentage MDD ≈ 33.33%.
Frequently Asked Questions about Maximum Drawdown
1. What does Maximum Drawdown measure?
It measures the largest peak-to-trough decline in the value of an investment during a specific period. It quantifies the largest historical loss from a high point.
2. Why is MDD a useful risk metric?
It shows the potential downside risk and provides a sense of the worst historical loss an investor might have experienced. It helps assess the volatility and potential pain of holding an investment.
3. How is Percentage MDD calculated?
It is calculated as the absolute difference between the peak value and the subsequent lowest trough value, divided by the peak value, and then multiplied by 100. Percentage MDD = ((Peak - Trough) / Peak) * 100.
4. Does MDD consider the time it takes to recover from a loss?
No, MDD only measures the magnitude of the largest drop from peak to trough. It doesn't account for the duration of the drawdown or the time taken to reach a new peak (Recovery Period).
5. What kind of input data is needed for the calculator?
The calculator needs a sequence of numerical values representing the investment's value at discrete points in time (e.g., portfolio value at the end of each day, week, or month, or the price of a stock). At least two values are required.
6. Can the Maximum Drawdown be zero?
Yes, the MDD is zero if the investment value never drops below a previously achieved peak throughout the entire period analyzed.
7. What does a high Percentage MDD indicate?
A high percentage MDD means the investment experienced a large percentage loss from its peak value. This suggests higher volatility and potentially higher risk compared to investments with lower MDD.
8. Is MDD always calculated from the very first value?
Not necessarily. The calculation continuously tracks the highest peak reached *so far*. Any subsequent drop is measured from *that* highest peak until a *new* highest peak is reached. The MDD is the largest of all such peak-to-trough drops.
9. Can the calculator handle negative input values?
Yes, the calculator can handle negative values. This is useful if you are tracking metrics like Profit/Loss (P/L) over time, which can be positive or negative.
10. How does this tool prevent issues with special characters in WordPress?
The JavaScript code that parses the input values and performs calculations has been written to avoid using complex logical operators like `&&` and `||` in patterns known to sometimes be corrupted by certain WordPress filters. Input parsing explicitly checks each value for validity rather than relying solely on filter functions with potentially problematic characters.
