What Is Drawdown?
Drawdown refers to the maximum reduction in value from the peak value of an investment or fund over a specific period of time.
It quantifies the extent to which an investment can decrease in value.
Drawdown meaning | Source: Investopedia
Calculating drawdown can help assess the risk associated with an investment and make informed decisions.
Investments with higher drawdowns are considered riskier, while those with lower drawdowns offer a smoother investment experience.
Understanding Drawdown in Trading
Drawdown is commonly used in trading and represents the peak-to-valley decline of an account during a recorded period.
It can be utilized to evaluate the effectiveness of a trading strategy or estimate the equity capital required to avoid significant drawdowns.
Daily vs. Monthly Approaches
Drawdown can be calculated based on daily trading prices or monthly account balances. The former is useful for traders who want to understand their daily maximum loss, while the latter is more suitable for investors interested in long-term returns.