Question 1

How is max drawdown calculated?

Accepted Answer

Max drawdown compares each low point against the highest value reached before it, and keeps the worst result: the peak-and-trough pair chosen is the one producing the largest fall anywhere in the period. Because it is a ratio, max drawdown does not depend on how much starting capital you used. $$ 	ext{max drawdown} = \frac{{	ext{trough value}} - {	ext{peak value}}}{{	ext{peak value}}} $$ where: the lowest value reached after that peak, before the strategy recovered the highest value the strategy had reached before the fall

Question 2

How does Fincanva handle it?

Accepted Answer

A backtest's Capital Growth page opens on four tiles: Final value, Vs benchmark, Max drawdown and CAGR. Max drawdown is measured on the strategy's capital curve over the whole backtest window, and shown as a negative percentage — a deeper fall is a more negative number. The metrics table shows it in the Drawdown group as the row Max drawdown; the capital view shows the same figure as a KPI, and the by-year table repeats it per calendar year. The monthly returns heatmap shows the per-year version in the compact DD column. Your benchmark gets its own max drawdown over the same window, so the two are directly comparable.

Question 3

What does it look like in practice?

Accepted Answer

A strategy climbs to a peak of 12,000, then falls to a low of 9,000 before recovering. Its drawdown from that peak is (9,000 − 12,000) ÷ 12,000 = −25%. If no other fall in the period is deeper, −25% is the max drawdown.

Now suppose the same strategy recovers and finishes the backtest at 14,000, a total return of +40%. The max drawdown is still −25%: the figure records the worst dip along the path, and a strong ending does not erase it. Total return asks where you ended; max drawdown asks how bad it got on the way.

Question 4

Where else does Fincanva use max drawdown?

Accepted Answer

Max drawdown is selectable as the Risk measure in the Inverse volatility allocation method, as the alternative to Annualized volatility — there it decides weights rather than reporting a result. It feeds the return-to-drawdown ratio, which divides the period's return by the size of the max drawdown. A drawdown deep enough to reach the simulation's floor triggers the bankruptcy rules, which close every position and leave the curve flat for the rest of the run.

Question 5

What counts as a good value?

Accepted Answer

A max drawdown closer to zero means the strategy's value never fell far below its running high during the period. It describes depth only — it says nothing about how long the strategy stayed down, which is what longest drawdown and longest recovery measure, nor how far below its own starting point a typical start date left it, which is average pain. Two strategies with the same max drawdown can look very different if one recovered in two months and the other took three years.

Max drawdown is also period-bound: it can only report the worst fall that happened inside your backtest window, so a shorter window has had fewer chances to produce a deep one.

No drawdown figure is a limit on future losses.