The drawdown refers to the decline in a trading account’s value from its peak to its lowest point before recovery. It measures the size of a loss during a losing streak or market downturn. Smaller drawdowns indicate better risk control, while large drawdowns can be difficult to recover from. Drawdowns are especially common during bear markets or when leverage trading goes wrong, wiping out significant account value.
Example:
A portfolio grows from $10,000 to $15,000, then falls to $12,000 before recovering. The drawdown is $3,000, or 20%.