The **drawdown** is the measure of the decline from a historical peak in some variable (typically the cumulative profit or total open equity of a financial trading strategy).^{[1]}

The **maximum drawdown** (MDD) up to time is the maximum of the drawdown over the history of the variable. More formally, the MDD is defined as:

Trading definitions

There are two main definitions of a drawdown:

**How low it goes (the magnitude)**

Putting it plainly, a **drawdown** is the “pain” period experienced by an investor between a peak (new highs) and subsequent valley (a low point before moving higher).^{[citation needed]}

Next, the **Maximum Drawdown**, or more commonly referred to as Max DD. This is pretty much self explanatory, as the Max DD is the worst (the maximum) peak to valley loss since the investment’s inception.^{[citation needed]}

In finance, the use of the maximum drawdown as an indicator of risk is particularly popular in the world of commodity trading advisors through the widespread use of three performance measures: the Calmar ratio, the Sterling ratio and the Burke ratio. These measures can be considered as a modification of the Sharpe ratio in the sense that the numerator is always the excess of mean returns over the risk-free rate while the standard deviation of returns in the denominator is replaced by some function of the drawdown.

**How long it lasts (the duration)**

The **drawdown duration** is the length of any peak to peak period, or the time between new equity highs.

The **max drawdown duration** is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs).

Banking or other finance definitions

**Credit offered**

Where an amount of credit is offered, a drawdown against the line of credit results in a debt (which may have associated interest terms if the debt is not cleared according to an agreement.)

**Funds offered**

Where funds are made available, such as for a specific purpose, drawdowns occur if the funds – or a portion of the funds – are released when conditions are met.

Optimization of drawdown

A passing glance at the mathematical definition of drawdown suggests significant difficulty in using an optimization framework to minimize the quantity, subject to other constraints; this is due to the non-convex nature of the problem. However, there is a way to turn the drawdown minimization problem into a linear program.^{[3][4]}

They call this the *conditional drawdown-at-risk* (CDaR); this is a nod to conditional value-at-risk (CVaR), which may also be optimized using linear programming. There are two limiting cases to be aware of:

- is the average drawdown
- is the maximum drawdown

References

**^***“What Is A Drawdown? – Fidelity”. www.fidelity.com. Retrieved 2019-08-04.***^***Magdon-Ismail, Malik; Atiya, Amir F.; Pratap, Amrit; Abu-Mostafa, Yaser S. (2004). “On the Maximum Drawdown of a Brownian Motion”**(PDF)**. Journal of Applied Probability.***41**(1): 147–161.**^***Chekhlov, Alexei; Uryasev, Stanislav; Zabarankin, Michael (2003). “Portfolio Optimization with Drawdown Constraints”**(PDF)**.***^***Chekhlov, Alexei; Uryasev, Stanislav; Zabarankin, Michael (2005). “Drawdown Measure in Portfolio Optimization”**(PDF)**. International Journal of Theoretical and Applied Finance.***8**(1): 13–58.

Ofer Abarbanel – Executive Profile