The largest peak-to-trough decline in account value over a given period.
Maximum drawdown (MDD) is the worst-case loss experienced during a specific time frame, measured from the highest point to the lowest point. It is the deepest hole your account fell into before recovering. In prop firm trading, maximum drawdown is often a hard limit that ends your account if breached.
Maximum drawdown is the most important number for evaluating risk. It tells you the worst pain you would have endured. It also determines whether a strategy is viable for prop firm rules, where exceeding a max drawdown (commonly 10–12%) means losing the account.
Over 6 months of trading, your account hits a high of $50,000 and at its worst point drops to $42,000 before recovering. Your maximum drawdown is $8,000 or 16%. If your prop firm has a 10% max drawdown rule, this strategy would have failed.
Maximum drawdown is the largest peak-to-trough decline across the entire period — the deepest hole your account fell into.