Drawdown Analyzer
Evaluate your investment risk by analyzing drawdowns. Calculate maximum drawdown, review historical performance, and estimate recovery time.
The highest value your investment reached
The lowest value after the peak
How to Use This Drawdown Analyzer
- Quick Calculator: Enter your investment's peak value (highest point) and trough value (lowest point after the peak) to instantly calculate the maximum drawdown percentage and the gain required to recover.
- Historical Analyzer: Enter a ticker symbol and date range to analyze historical drawdown events. View the price chart with drawdown periods highlighted and a detailed table of significant drawdown events.
- Recovery Estimator: Input a drawdown percentage and your expected annual growth rate to estimate how long it will take to recover your losses.
- Use the reference table in the Recovery Estimator to understand the relationship between drawdown depth and recovery difficulty.
What is Drawdown?
Drawdown is a measure of the decline from a historical peak in the value of an investment, portfolio, or trading account. It is typically expressed as a percentage and represents the peak-to-trough decline before a new peak is achieved.
Maximum Drawdown (MDD) is the largest observed loss from a peak to a trough of a portfolio, before a new peak is attained. It is an important risk indicator that helps investors understand the potential downside of an investment strategy.
The formula for calculating drawdown is:
Drawdown (%) = (Peak Value - Trough Value) / Peak Value × 100Why Drawdown Analysis Matters for Traders
- Risk Assessment: Drawdown provides a clear picture of the worst-case scenario for your investment. A strategy with high returns but extreme drawdowns may not be suitable for risk-averse investors.
- Recovery Reality: Understanding the gain required to recover from a drawdown is crucial. A 50% loss requires a 100% gain to break even, making large drawdowns particularly devastating.
- Strategy Comparison: When comparing trading strategies or investments, drawdown analysis helps you evaluate risk-adjusted returns, not just absolute returns.
- Position Sizing: Knowing historical drawdowns helps you size your positions appropriately to survive worst-case scenarios.
- Psychological Preparation: Understanding potential drawdowns prepares you mentally for market downturns, helping you stick to your strategy during difficult periods.
Frequently Asked Questions
What is a good maximum drawdown?
"Good" depends on your risk tolerance and investment type. For the S&P 500, drawdowns of 10-20% are common, with 50% being rare (like in 2008). Conservative portfolios typically aim for less than 10%, while aggressive strategies might accept 20-30%. The key is ensuring the drawdown aligns with your ability to stay invested.
How is drawdown different from volatility?
Volatility measures the standard deviation of returns (both up and down), while drawdown specifically measures the decline from a peak. Drawdown is more intuitive for understanding actual losses, while volatility captures overall price fluctuation.
Why does recovery take so long after a large drawdown?
Recovery is asymmetric because you're working from a smaller base. After a 50% loss, you need a 100% gain just to break even. This mathematical reality is why professional traders focus heavily on risk management and limiting drawdowns.
How can I reduce my portfolio's drawdown?
Common strategies include: diversification across asset classes, using stop-loss orders, reducing position sizes, hedging with options, and maintaining cash reserves. The goal is to limit losses during market downturns while still participating in upside.
Related Tools
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Determine the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.
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Measure the risk-adjusted return of an investment portfolio.
Calmar Ratio Calculator
Measure the performance of an investment fund compared to its maximum drawdown.
Sortino Ratio Calculator
Evaluate risk-adjusted returns focusing only on downside volatility.
Turn Risk Analysis into Automated Trading Strategies
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Disclaimer: This tool is for informational and educational purposes only. It does not constitute investment advice. All calculations are based on user inputs and/or historical data. Past performance does not guarantee future results. Always consult with a qualified financial advisor before making investment decisions.