What Is Maximum Drawdown?
Maximum Drawdown (MDD) is the largest peak-to-trough decline in the value of an asset or portfolio over a specific time period. It is calculated by finding the biggest percentage drop from any historical high to the subsequent lowest point before a new high is established. For example, if a stock rose from $50 to $200 and then fell to $90 before eventually recovering, the maximum drawdown would be -55% (the decline from $200 to $90).
MDD is one of the most widely used risk metrics in portfolio management, hedge fund evaluation, and institutional investing. Fund managers report it to prospective investors as a measure of downside risk. Analysts use it for stress testing and risk budgeting. Because MDD captures the absolute worst historical decline, it is especially useful for understanding how painful an investment could be to hold through a severe downturn.
What Is the Drawdown Severity Score?
The Drawdown Severity Score is a proprietary metric developed by DrawdownAlerts that measures how unusual the current drawdown is relative to an asset's own historical behavior. Rather than reporting a simple percentage, it compares the current decline against the asset's typical drawdown patterns, adjusting for that asset's natural volatility.
A Severity Score of 1.0 means the current drawdown is roughly in line with the asset's average pullback. A score of 5.0 means the drawdown is approximately five times deeper than normal — a statistically rare event. Scores above 5.0 are considered extreme and tend to correspond with historically attractive entry points for long-term investors. You can read the full methodology behind the score for technical details.
Side-by-Side Comparison
| Feature | Maximum Drawdown | Severity Score |
|---|---|---|
| What it measures | Largest historical decline | How unusual the current decline is |
| Time frame | Historical (backward-looking) | Current (real-time) |
| Output | A percentage (e.g., -55%) | A score (0–12+) |
| Volatility-adjusted | No | Yes |
| Use case | Risk assessment | Opportunity identification |
| Standard metric? | Yes (industry standard) | No (proprietary) |
When to Use Each Metric
Both metrics have clear, complementary roles in an investor's toolkit. Choosing the right one depends on the question you are trying to answer.
Use Maximum Drawdown for:
- Portfolio construction — Understanding the worst-case scenario helps you decide how much of your portfolio to allocate to a given asset.
- Risk budgeting — Setting maximum acceptable loss thresholds for an overall portfolio or individual positions.
- Comparing fund performance — MDD is a standard metric reported by mutual funds, hedge funds, and ETFs, making it easy to compare across managers.
- Stress testing — Simulating how a portfolio would have performed during historical worst-case scenarios.
Use the Severity Score for:
- Identifying buying opportunities — The score highlights when a drawdown is statistically unusual, suggesting a potential buying opportunity.
- Setting alert thresholds — Configure alerts at specific severity levels (e.g., notify me when severity reaches 5+) to act on rare events.
- Understanding if a drawdown is unusual — A 15% drawdown is routine for some stocks and extraordinary for others. The Severity Score tells you which.
Example: Why Context Matters
Consider a 20% drawdown — the same percentage decline means very different things depending on the asset:
Low-volatility utility stock
Maximum Drawdown might be -30%, and a typical pullback is just 3-5%. A 20% decline is deeply unusual for this stock — the Severity Score might register around 7.0, flagging a rare, significant event.
High-volatility tech stock
Maximum Drawdown might be -70%, and typical pullbacks run 15-25%. A 20% decline is just a routine dip — the Severity Score might only register around 1.5, indicating nothing out of the ordinary.
MDD alone does not tell you this. It tells you the worst that has happened, but not whether the current decline is worth acting on. The Severity Score adjusts for the asset's historical behavior, giving you the context that a raw percentage cannot. This is why understanding drawdowns requires more than a single number.
Frequently Asked Questions
Is Maximum Drawdown or Severity Score better?
Neither is universally better — they serve different purposes. Maximum Drawdown is the industry standard for assessing worst-case historical risk and is essential for portfolio construction, fund comparison, and regulatory reporting. The Drawdown Severity Score is designed for real-time opportunity identification, telling you whether the current drawdown is unusual relative to the asset's own history. Use MDD to understand risk. Use the Severity Score to identify when a drawdown might represent a buying opportunity.
Can I use both metrics together?
Yes, and using both together gives you a more complete picture. Maximum Drawdown tells you the worst-case scenario for an asset, helping you set expectations and size positions appropriately. The Severity Score tells you whether the current drawdown is unusual enough to warrant attention. For example, if a stock has an MDD of -60% and a current Severity Score of 8.0, you know the stock has experienced deep declines before AND the current decline is far outside its normal pattern — a powerful combination of context.
Where can I find Maximum Drawdown data?
Maximum Drawdown data is available from most financial data providers and portfolio analytics platforms. On DrawdownAlerts, every ticker page (e.g., AAPL) shows historical drawdown data alongside the Drawdown Severity Score. You can also browse current drawdown levels for thousands of stocks, ETFs, and cryptocurrencies on the Explore page. See our glossary for definitions of related terms.
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See Both Metrics in Action
DrawdownAlerts shows drawdown history and real-time Severity Scores for thousands of stocks, ETFs, and crypto. Explore current data or set up alerts to act on unusual drawdowns.