# Max drawdown: what it is and how to calculate it

> Max drawdown is the biggest fall from a peak to a low. Learn the formula, the recovery math, and the S&P 500's worst drops in 2008 and 2020.

Written by [Tactfolio research team](https://tactfolio.com/about/editorial-policy.md), published 2026-10-16, updated 2026-10-16, data as of 2026-09-25.

Max drawdown is the biggest drop an investment suffered from a high point to a later low, before it climbed to a new high. It is shown as a percentage, such as −30%. It answers a plain question: what is the worst loss you would have had to sit through?

## Key points

- A **drawdown** is any fall from a previous high. The **max drawdown** is the largest one over a period.
- Formula: (lowest value − peak value) ÷ peak value.
- Losses need bigger gains to recover. A 50% loss needs a 100% gain to get back to even.
- The S&P 500 fell about 57% from October 2007 to March 2009, and about 34% in five weeks in 2020.
- Max drawdown shows the size of the worst loss, not how long it lasted or how often it happens.

## What is max drawdown?

Max drawdown is the largest percentage fall from a peak to a trough in an investment's history. A **peak** is a high point. A **trough** is the lowest point before the next new high.

It is one of the most important numbers in [algorithmic trading](https://tactfolio.com/learn/algorithmic-trading.md) and investing, because it shows pain in a way averages do not. A strategy can average 10% a year and still have lost half its value at some point. The max drawdown tells you that.

## How do you calculate max drawdown?

You calculate max drawdown by finding every peak, the lowest point after each one, and the percentage drop between them. The biggest of those drops is the max drawdown.

**Formula:**

Drawdown = (trough value − peak value) ÷ peak value

**Example.** Say you invest $10,000. Here is what happens over a few years:

| Point | Value | Note |
| --- | --- | --- |
| Start | $10,000 | |
| Peak 1 | $13,000 | New high |
| Trough 1 | $9,100 | ($9,100 − $13,000) ÷ $13,000 = −30% |
| Peak 2 | $14,000 | New high, the first drawdown is over |
| Trough 2 | $11,900 | ($11,900 − $14,000) ÷ $14,000 = −15% |
| End | $15,000 | |

There were two drawdowns, −30% and −15%. The max drawdown is −30%.

Notice that the drop from $13,000 to $9,100 ended below your $10,000 start. Max drawdown is measured from the peak, whatever you first put in. You lost $3,900 from the high, even though you had only $900 less than you started with.

## Why do bigger losses need even bigger gains?

Bigger losses need bigger gains because the recovery starts from a smaller amount. If $100 falls 50% to $50, a 50% gain only gets you to $75. You need 100% to get back to $100.

| Loss | Gain needed to get back to even |
| --- | --- |
| −10% | +11% |
| −20% | +25% |
| −30% | +43% |
| −40% | +67% |
| −50% | +100% |
| −60% | +150% |
| −75% | +300% |
| −90% | +900% |

This is why many investors read the max drawdown before the return.

## What were the S&P 500's biggest drawdowns?

Two recent drawdowns show how different they can be.

**2007 to 2009.** The S&P 500 fell 57% from its October 2007 peak to its low in March 2009 ([Federal Reserve History](https://www.federalreservehistory.org/essays/great-recession-of-200709)). That is a price-only figure. With dividends reinvested, an S&P 500 fund's worst fall since 2002 was about 55%, in a Tactfolio backtest as of September 25, 2026.

**2020.** The index closed at 3,386.15 on February 19, 2020, and at 2,237.40 on March 23. That is a drop of about 34% in about five weeks. It closed above its old high again on August 18, 2020 ([FRED](https://fred.stlouisfed.org/series/SP500)).

Both were deep. But one took years to play out, and the other was over in months. That is why max drawdown should be read next to how long the drawdown lasted.

## Max drawdown vs other risk measures

Max drawdown is one view of risk. Other numbers show different sides.

| Measure | What it shows | What it misses |
| --- | --- | --- |
| Max drawdown | The single worst fall | How often falls happen, and how long they last |
| Volatility | How much returns swing in a normal year | Rare, large crashes |
| [Sharpe ratio](https://tactfolio.com/learn/sharpe-ratio.md) | Return for each unit of volatility | The size of the worst loss |
| [Calmar ratio](https://tactfolio.com/learn/calmar-ratio.md) | Yearly return divided by max drawdown | Everything except that one worst fall |

Max drawdown has its own weak spot. It is one event. A long test that includes 2008 will show a bigger number than a short test that does not, even for the same strategy. Always check the dates.

## How do strategies compare on max drawdown?

Here are hypothetical backtests from Tactfolio's classic strategies, as of September 25, 2026. They use daily prices with dividends reinvested and a 0.05% cost per trade.

| Strategy | Test starts | Worst drawdown | S&P 500 worst drawdown over the same test |
| --- | --- | --- | --- |
| [60/40 Portfolio](https://tactfolio.com/strategies/60-40-portfolio.md) | Mid-2002 | About 33% | About 55% |
| [Golden Butterfly](https://tactfolio.com/strategies/golden-butterfly-portfolio.md) | Late 2004 | About 20% | About 55% |
| [200-day moving average](https://tactfolio.com/strategies/200-day-moving-average.md) | Mid-2007 | About 22% | About 55% |

Smaller drawdowns usually come with lower returns. The 60/40 portfolio returned about 8% a year over its test, against about 11% for the S&P 500. A smaller drop is only worth it if the return you give up is a trade you are happy with.

## Common mistakes

- **Judging by return alone.** A high return with a 60% drawdown may be one you could not have held through.
- **Using a short test.** Five calm years can hide how bad a strategy gets. Our [backtesting guide](https://tactfolio.com/learn/backtesting-explained.md) explains why longer tests matter.
- **Ignoring time to recover.** A 25% drop that takes five years to recover can hurt more than a 35% drop that recovers in one.
- **Thinking the past max is the worst case.** The next drawdown can be bigger than any in the test.

## Try it on Tactfolio

Every Tactfolio backtest shows the max drawdown and a drawdown chart, with how long each recovery took. Our guide on [how to read a backtest](https://tactfolio.com/docs/concepts/reading-a-backtest.md) suggests reading drawdown first. You can also use drawdown inside a rule. The [builder](https://tactfolio.com/builder) has a Maximum drawdown reading and a rolling-high ratio, which compares today's close with the highest close in a window. With the ratio, a strategy could step into bonds when a fund closes more than 10% below its recent high. All backtests are hypothetical, and real drawdowns can be deeper.

## Common questions

### What is max drawdown in trading?

It is the largest drop in an account or strategy from a high point to a later low, as a percentage. Traders use it to see the worst loss a strategy has had. It is often read alongside return and the Sharpe ratio.

### What is a good max drawdown?

There is no single good number. It depends on what you hold and how much loss you can live with. For context, a 60/40 stock and bond mix had a worst drawdown of about 33% since 2002. The S&P 500 had about 55%. Both figures are from hypothetical backtests as of September 25, 2026.

### How long does it take to recover from a drawdown?

It varies a lot. The S&P 500 got back to its February 2020 high by August 2020. Recoveries after deeper, longer falls, such as 2007 to 2009, have taken years.

### Is drawdown the same as a loss?

Not quite. A drawdown is measured from the highest value, so you can be in a drawdown even if you are still above what you put in. A loss is usually measured from what you paid.

### What does drawdown mean in retirement?

In retirement planning, "drawdown" often means withdrawing money from your savings over time. That is a different idea from max drawdown, which measures the size of a fall in value.

## Put it into practice

- [Monte Carlo simulator](https://tactfolio.com/trading-tools/monte-carlo-simulation.md): Run 10,000 random futures for your savings and see the chance your money lasts, with a bad case and a good case.
- [Backtest a portfolio](https://tactfolio.com/trading-tools/backtest-portfolio.md): Backtest a portfolio of US stocks and ETFs. Enter tickers and shares, pick when to rebalance, and get the results with a link to share.
- [ETF screener](https://tactfolio.com/screener.md): A free ETF screener for 162 US-listed funds. Filter by type, issuer and fee, sort by returns or worst drop, and compare funds side by side.
- [Every ETF, with fees and returns](https://tactfolio.com/etf.md): What each ETF holds, what it costs, how it did year by year, its worst drop, and which Tactfolio strategies hold it.

## Sources

- [The Great Recession](https://www.federalreservehistory.org/essays/great-recession-of-200709), Federal Reserve History, accessed 2026-10-16
- [S&P 500 (SP500)](https://fred.stlouisfed.org/series/SP500), S&P Dow Jones Indices via FRED, Federal Reserve Bank of St. Louis, accessed 2026-10-16
- [60/40 Portfolio](https://tactfolio.com/strategies/60-40-portfolio), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16
- [Golden Butterfly Portfolio](https://tactfolio.com/strategies/golden-butterfly-portfolio), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16
- [200-Day Moving Average Strategy](https://tactfolio.com/strategies/200-day-moving-average), Tactfolio, figures as of September 25, 2026, accessed 2026-10-16
- [How to read a backtest](https://tactfolio.com/docs/concepts/reading-a-backtest), Tactfolio, accessed 2026-10-16