Drawdown
A drop in your bankroll from a previous peak, measured as the decline before you recover. The maximum drawdown is the worst such drop over a period.
Drawdowns are inevitable even with a real edge, because variance strings losses together. Understanding your typical and worst-case drawdown is what keeps you from oversizing and from quitting a sound strategy at the bottom.
Drawdown is the decline from a peak in your account value to a subsequent low, usually expressed as a dollar amount or a percentage. It measures how far you fell from your best point before recovering, and the maximum drawdown over a period is one of the clearest single numbers for the pain a strategy puts you through.
Drawdowns are unavoidable for any strategy with variance, including profitable ones. What separates sustainable traders from blown-up ones is whether their position sizing lets them survive a normal drawdown without being forced to stop. A strategy with a great long-run edge is worthless if its drawdowns are deep enough to trigger ruin or panic along the way.
Tracking drawdown alongside returns gives an honest picture of risk. Two strategies can post the same profit while one rode a smooth curve and the other survived a stomach-churning 50 percent dip. The second is far more likely to be abandoned at the worst possible moment, which is why drawdown, not just total return, belongs at the center of how you judge performance.
Your account climbs to $10,000, then a losing streak takes it to $7,000 before it recovers. That $3,000 fall, a 30 percent drawdown, is the depth of the dip from peak to trough, regardless of where the account ends up later.
Frequently asked questions
What is a drawdown?
It is the decline from a peak in your account value to a later low, shown as a dollar amount or percentage. Maximum drawdown is the largest such fall over a period.
Are drawdowns avoidable?
No. Any strategy with variance has drawdowns, including profitable ones. The goal is to size positions so a normal drawdown does not force you to stop or wipe you out.
Why track drawdown instead of just returns?
Because it measures the risk and emotional strain behind a return. Two strategies with equal profit can have very different drawdowns, and the deeper one is far more likely to be abandoned at the wrong time.