Glossary / Risk

Drawdown

Also called: maximum drawdown · max DD

Drawdown is the decline from a peak value to the lowest point reached before a new peak, expressed as a share of that peak. Maximum drawdown is the largest such decline observed over a period.

How it is measured

How is drawdown measured?

Walk forward through the value series. At each point, compare the current value to the highest value seen so far and record the shortfall. The largest shortfall recorded is the maximum drawdown. Two further descriptors are commonly reported alongside it: the duration of the decline, and the time taken to regain the prior peak.

Why it matters

Why does drawdown matter to a swing trader?

Drawdown describes the depth of a decline, which is the dimension a percentage change between two endpoints hides entirely. The arithmetic is also asymmetric in a way that is easy to state and easy to forget: recovering from a decline requires a larger percentage rise than the percentage fall that caused it, because the rise is computed from a smaller base. That asymmetry grows sharply as declines deepen.

Related

See this in the product

What Tapeline does not model · Full methodology

Related terms

Volatility
Volatility measures how much a security's price varies around its own average over a period.
Average true range
Average true range is the average size of a security's daily trading range over a recent window, where the range is defined to include any overnight gap.
Position sizing
Position sizing is the decision of how much capital to commit to any single holding.
Stop-loss order
A stop-loss is a resting instruction to a broker that becomes active when price reaches a specified trigger level.

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General information about market vocabulary, written to be descriptive rather than prescriptive. Not investment advice — see the risk disclosure.