Trading glossary
Drawdown measures the decline from a peak to a trough in an account or strategy. Learn how it is calculated and why it matters for risk assessment.
Drawdown measures how far a value has fallen from its highest point before recovering, expressed as a percentage of that peak. If an account rises to a high and then declines, the drop from that high to the lowest point along the way is the drawdown. It is a common way to describe how much loss occurred during a losing stretch.
Maximum drawdown is the largest peak-to-trough decline observed over a period, and it is often used to judge how severe a strategy's worst run has been. A strategy with attractive average returns can still have a deep maximum drawdown, which is why many traders review this figure to understand the size of losses an approach has historically produced.
Drawdown helps put returns in context, because recovering from a large decline requires a proportionally larger gain. Studying drawdown alongside position sizing helps a trader gauge whether they could tolerate a strategy's rough periods. Drawdown figures describe the past and are not predictions or advice, and all trading carries the risk of loss of capital.
Drawdown is the decline from a peak value to a later low, divided by the peak and expressed as a percentage. Maximum drawdown is the largest such decline over the period studied.
Because the gain is measured from a smaller base. A 50 percent decline requires a 100 percent gain to return to the original value, since the recovery is calculated on the reduced amount.