Maximum Drawdown
The largest peak-to-trough decline in an account's equity before it reaches a new high.
Maximum drawdown (often shortened to 'max DD') measures the single worst losing streak a strategy has experienced, from its highest equity point down to the lowest point that followed, before recovering to a new high.
It's expressed as a percentage of the peak equity value. A strategy that grew an account from $10,000 to $15,000, then fell back to $12,000 before recovering, had a maximum drawdown of 20% ($3,000 of the $15,000 peak).
Max Drawdown = (Peak Equity − Trough Equity) ÷ Peak Equity × 100
A gold-trading EA with a 7.8% max drawdown has historically never lost more than 7.8% of its account value from any equity peak — a meaningfully different risk profile than a strategy with a 30% max drawdown, even if both show similar annual returns.
Why it matters
Drawdown is arguably the most important number for position sizing and psychological tolerance. A strategy can have an excellent long-term return and still be unusable for a given trader if its drawdowns exceed what they can tolerate — financially or emotionally — without abandoning it.