Maximum drawdown
Understand maximum drawdown, the formula behind the largest peak-to-trough fall, and how to read it with a hypothetical Company A example.
What is Maximum drawdown?
Maximum drawdown is the largest percentage fall from a prior peak to a later trough within a chosen period. It gives a sense of the worst decline a holding or portfolio experienced in that period. It describes past behaviour and is not a forecast of future losses.
How it is calculated
Track the running peak value. Drawdown at each point equals (trough value minus prior peak value) divided by prior peak value, times 100%. Maximum drawdown is the most negative of these readings across the period, usually quoted as a positive percentage.
How Malaysian investors use it
Bursa counters can fall sharply within short periods. Investors compare maximum drawdown across a holding, a sector and the FBM KLCI to see which swung most. A small-cap counter on the ACE Market can show a much larger drawdown than a large Main Market counter over the same dates.
Worked example: Company A
A hypothetical Company A holding is worth RM12,500 at its peak and falls to RM9,500 at its lowest point afterwards.
- Drawdown = (9,500 minus 12,500) divided by 12,500 = -24%.
A later recovery would not change this figure, because it records only the largest fall in the period.
Common mistakes
- Using a window too short to capture the real downside.
- Comparing drawdowns measured over different dates or periods.
- Assuming the figure caps future losses.
Related terms
- Market breadth – shows whether a fall is broad across the market or concentrated.
- Sector rotation – explains why one sector can fall while others hold up.
- End-of-day data – the daily closing values many drawdown figures are based on.
Frequently asked questions
Is maximum drawdown the same as a realised loss?
No. It measures a decline within a period, even if the holding later recovered. A realised loss arises only when a position is closed at a lower value.
Does a small maximum drawdown mean an investment is safe?
No. It reflects only the period measured, and future declines can be larger than any past one.
Why express it as a percentage rather than in ringgit?
A percentage makes holdings of different sizes comparable. A RM1,000 fall on RM2,000 is far more severe than the same fall on RM20,000.
See how this fits into Finworld Software, or book a demo.
Finworld provides market education and research tools only. This is not investment advice. Market data is end-of-day.
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