Glossary
Drawdown
The decline from a portfolio's or price's peak to its subsequent trough, usually stated as a percentage.
A drawdown is how far an investment has fallen from its highest point before it recovers. It is measured from a peak to the lowest point that follows, usually in percent, and the largest one over a period is the maximum drawdown. Where Volatility measures how bumpy the ride is, drawdown measures the deepest hole you would have had to sit in.
Worked examples
Why drawdowns matter so much
Losses and gains are not symmetric. Getting back to even after a decline takes a larger percentage gain than the loss itself:
| Drawdown | Gain needed to recover |
|---|---|
| −10% | +11.1% |
| −25% | +33.3% |
| −50% | +100% |
| −75% | +300% |
Drawdown also captures what people actually feel. Many investors who are comfortable with an annual standard deviation of 15% abandon a plan halfway through a 35% decline. That is why traders compare strategies on maximum drawdown alongside return, and why Position size rules often start from the worst loss an account can tolerate.
Things to keep in mind
The duration of a drawdown, the time spent below the old peak, can matter as much as its depth. A backtest's maximum drawdown is a historical figure; future ones can be deeper.