Max Drawdown

Max drawdown is the single worst peak-to-trough decline in your account equity over the entire history of the strategy or account. If your account peaked at $20,000 and then dropped to $14,000 before recovering, your max drawdown is 30%. Max drawdown is the most important risk number prop firms, fund allocators, and serious traders track. The number matters because it tells you how much pain you have to absorb to capture the upside. A strategy that returns 40% per year with a 5% max drawdown is excellent. A strategy that returns 40% per year with a 35% max drawdown is much worse — same returns, way more pain, way higher chance of capitulation. Live max drawdown is almost always BIGGER than backtest max drawdown. Account for this by sizing for 1.5x-2x the historical figure when going live.