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.
Example:
A portfolio grows from $10,000 to $15,000, then falls to $12,000 before recovering. The drawdown is $3,000, or 20%.