Maximum drawdown can be used to assess Account returns relative to a benchmark index, as a means to identify strategies that show steady outperformance overtime. It measures the biggest value fall (trough) in the Account over a period of time, from a value increase (peak) during the period. Maximum drawdown is calculated as:
Assume that within a specified investment period an Account starts with USD 6000 and increases in value to USD 9000, the value then falls in value to USD 4000 before increasing in value to USD 10,200. The Account then falls in value again to USD 4500 and then increases to USD 10,500. The maximum drawdown for this Account will be calculated as:
Note that the highest peak of the Account is USD 10,500 and a decline in value of USD 5000 (USD 9000 - USD 4000) was also registered. This, however, is not the biggest loss during the investment period, as a loss of USD 5,700 (USD 10200 - USD 4500) is later observed. Maximum drawdown thus measures the largest drop in Account Value in relation to the peak from which the value is dropping.
SAXO BANK measures maximum drawdown over a rolling 12 month-to-date period. The maximum drop in Account Value, from a peak, is used to calculate the maximum drawdown over a period of 12 months.