Drawdown is a measure of peak-to-trough decline, usually given in percentage form. In trading, drawdown refers to the reduction in your trading account from a trade or a series of trades.
For instance, your trading account is initially at $10,000 then you lost $2,500 today and $2,500 the next day. Your account would then be at $5,000 and you would’ve had a 50% drawdown. In other words, a drawdown measures how much you’ve lost before you get your account back to par. But with a $5,000 remaining balance, you’d need to win another $5,000 to bring your account back to breakeven … That’s a 100% gain!
Knowing your trade’s drawdown is an important part of risk management. Traders usually take note of their maximum drawdown, which is the largest top-to-bottom loss incurred under a trading strategy. While “Maximum Drawdown” sounds like your typical summer blockbuster movie, it ain’t cool since it basically measures your biggest losing streak!