Maximum Drawdown: -33.72%
Peak Date: 2020-02-19
Trough Date: 2020-03-23Drawdowns
Measuring peak-to-trough declines
finance
basics
risk
Drawdown analysis measures the decline from peak value, a critical risk metric for understanding worst-case scenarios.
1 Abstract
A drawdown measures the decline from a historical peak to a subsequent trough. Maximum drawdown (MDD) represents the largest peak-to-trough decline over a period and is a key risk metric that captures the worst-case loss an investor could have experienced.
2 Definition
The drawdown at time \(t\) is:
\[ DD_t = \frac{P_t - P_{max,t}}{P_{max,t}} \]
Where:
- \(P_t\) = current price
- \(P_{max,t} = \max_{s \leq t} P_s\) = running maximum price up to time \(t\)
The maximum drawdown is:
\[ MDD = \min_t(DD_t) \]
Note: Drawdowns are typically expressed as negative percentages.
3 Recovery Time
The drawdown duration is the time from peak to recovery (new high). Extended drawdowns can be psychologically challenging and may force liquidation at the worst time.
4 Compute (Python)
5 Price and Drawdown Chart
6 Worst Drawdowns
| Peak Date | Trough Date | Recovery Date | Drawdown (%) | Days to Trough | Days to Recovery | |
|---|---|---|---|---|---|---|
| 95 | 2020-02-20 | 2020-03-23 | 2020-08-10 | -33.72 | 32 | 172.0 |
| 145 | 2022-01-04 | 2022-10-12 | 2023-12-13 | -24.50 | 281 | 708.0 |
| 70 | 2018-09-21 | 2018-12-24 | 2019-04-12 | -19.35 | 94 | 203.0 |
| 178 | 2025-02-20 | 2025-04-08 | 2025-06-26 | -18.76 | 47 | 126.0 |
| 66 | 2018-01-29 | 2018-02-08 | 2018-08-06 | -10.10 | 10 | 189.0 |
7 Drawdown Distribution
8 Comparison Across Assets
| Ticker | Max Drawdown (%) | Avg Drawdown (%) | Time in Drawdown (%) | |
|---|---|---|---|---|
| 0 | SPY | -33.72 | -5.09 | 83.82 |
| 1 | QQQ | -35.12 | -7.22 | 84.53 |
| 2 | TLT | -48.35 | -20.80 | 98.09 |
| 3 | GLD | -22.00 | -7.25 | 92.80 |
9 Conclusion
Drawdown analysis reveals the risk that volatility measures miss: the actual peak-to-trough losses an investor experiences. Maximum drawdown is essential for setting realistic expectations, sizing positions appropriately, and comparing strategies on a risk-adjusted basis. A strategy with higher returns but deeper drawdowns may be unsuitable for investors who cannot tolerate large interim losses.