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).
Somewhat more formally, if
is a
stochastic process
In probability theory and related fields, a stochastic () or random process is a mathematical object usually defined as a family of random variables. Stochastic processes are widely used as mathematical models of systems and phenomena that appea ...
with
, the drawdown at time
, denoted
,
is defined as:
The average drawdown (AvDD) up to time
is the time average of drawdowns that have occurred up to time
:
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: