Distinguishing Current Drawdown, Maximum Drawdown, and Monthly Drawdown

Summary

The document clarifies how to interpret drawdown over a time series. Drawdown is measured from a preceding peak to a later trough; current drawdown describes the decline associated with the relevant current peak-to-trough period, while maximum drawdown is the largest drawdown observed over the chosen horizon. The answers distinguish the current decline from the worst historical decline in the plotted series.

It also discusses a possible operational definition of current monthly drawdown. For a calendar month, one approach compares the prior month-end account level with the lowest level observed from that month-end through the latest available date. This can support a rule that pauses trading after losses exceed a chosen threshold. The response presents this as a possible interpretation because the question’s monthly measure is ambiguous; exact results depend on the chosen time horizon, peak convention, and whether measurement is based on calendar periods or rolling peaks.

Key ideas

• Drawdown measures the decline from a prior peak to a subsequent trough.
• Current drawdown describes the active peak-to-trough decline over the selected period.
• Maximum drawdown is the largest drawdown observed across the full measurement horizon.
• A calendar-month drawdown can compare the previous month-end level with the lowest level reached in the current month.

Tags

# Definition of drawdown


# Definition of drawdown












Say I am considering the entire time horizon, is max drawdown what I've drawn in blue, or what's in purple?

Likewise, how about the current drawdown for the period in black (in practice, I am asked to compute the current monthly drawdown)?

## Answer by nbbo2 (score 1, accepted)

https://quant.stackexchange.com/a/54976

The Max Drawdown and the Current Drawdown have already been answered.

I am not quite sure what is meant by 'the current monthly drawdown'.

Some traders have a rule that they will stop trading for the rest of the month if the 'current [calendar] month drawdown' exceeds X%. This is calculated by comparing the level at the end of the previous month to the minimum of all levels from the last day of prev month to the latest available day this month. (For example:compare May 31 to the lowest of May 31, June 1, June 2, ..., June 15). Perhaps this is what you are referring to.

## Answer by chrisaycock (score 1)

https://quant.stackexchange.com/a/54974

The drawdown is the peak-to-trough over a time period. So your purple line is the "current drawdown". The "max drawdown" is the largest number of all drawdowns, which is your blue line.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.