Measured from the peak
drawdown at any point = (highest balance so far − current balance) ÷ highest balance so far
max drawdown = the largest of those
The reference is the running peak, not the starting balance. An account that grew from $10,000 to $11,500 and fell to $8,600 was in a 25.2% drawdown at the bottom — even though it was only 14% below where it started.
This is why you cannot compute it from the first and last figure of a period. The information lives in the path.
| Period | Balance | Peak so far | Drawdown |
|---|---|---|---|
| 1 | $10,000 | $10,000 | — |
| 2 | $11,500 | $11,500 | — |
| 3 | $9,800 | $11,500 | 14.8% |
| 4 | $8,600 | $11,500 | 25.2% |
| 5 | $10,200 | $11,500 | 11.3% |
| 6 | $12,400 | $12,400 | — |
The year finished +24%. It was down 25% on the way. Both are true, and they are used for entirely different purposes.
The comparison that matters
When the maximum drawdown is larger than the total return, the strategy asked you to live through a worse period than the one it paid for.
That is not a mathematical failure — plenty of good strategies do it — but it is the number that determines whether anyone actually collected the return. A curve that goes −25% before +24% loses most of its investors somewhere in the middle, and the ones who left did not get the +24%.
The calculator raises this comparison specifically, because return alone is the figure people quote and drawdown is the figure that decides.
Where it becomes a hard rule
On a funded or evaluation account, drawdown stops being a diagnostic and becomes a boundary that closes the account. The prop convention is the same one used here — measured from the peak — which is why a trailing limit rises with your profits and never falls back.
Two clauses decide everything on those accounts and vary by firm: whether the limit is recalculated at the close or in real time, and whether open positions count. The prop drawdown calculator works through both.
The two limits of this measure
It depends on how often you sample. Monthly balances hide intra-month falls, so a monthly max drawdown is always smaller than a daily one for the same account. Compare like with like.
It is a single worst case. One historical figure says nothing about how likely a deeper one is. For that you need the distribution rather than the record — which is what the risk of ruin simulator produces.