Maximum Drawdown

Maximum drawdown is the most “investor‑real” risk metric we use. It answers: “What was the biggest percentage loss from a peak to the subsequent low?”

It’s not about day‑to‑day noise. It’s about the kind of move that makes people capitulate at exactly the wrong time.

The definition

At each point in time, define the running peak:

$$\text{Peak}_t = \max\limits_{\tau \le t} P_\tau$$

Drawdown is the drop from that peak:

$$\text{DD}_t = \frac{P_t}{\text{Peak}_t} - 1$$

Maximum drawdown is the minimum drawdown in the window (the worst peak‑to‑trough drop):

$$\text{Max DD} = \min\limits_t \text{DD}_t$$

We report it as a negative percent (e.g., −55%).

How we calculate max drawdown at Gale Finance

1. We compute it from prices, not returns. Drawdown is about a portfolio value path.

2. No forward-filling: we use the observed closes; no invented “flat” prices on non-trading days.

3. Compare pages use the shared window. For pair comparisons, drawdowns are computed over the overlapping date range so both assets are judged over the same market regime.

4. Recovery time (when available): if the series later exceeds the prior peak, we record the recovery date and the number of calendar days from trough to recovery. If it never recovers within the window, we say so.

What max drawdown doesn’t tell you

• It’s window-dependent. A one‑year max drawdown and a ten‑year max drawdown are different beasts.
• It uses daily closes, so it won’t capture intraday extremes.
• It’s one number: it won’t tell you whether the asset had lots of medium drawdowns or one catastrophic one.

To round it out, pair it with volatility and tail metrics like Expected Shortfall.