What is a drawdown in trading?

A drawdown refers to how much an investment or trading account is down from the peak before it recovers back to the peak. Drawdowns are typically quoted as a percentage, but dollar terms may also be used if applicable for a specific trader. Drawdowns are a measure of downside volatility.

What is a drawdown & how does it work?

As noted above, a drawdown measures an investment or trading account's decline from the peak before it recovers back to that peak. The Ulcer Index (UI) helps to track these movements. It remains in effect as long as the price remains below the peak. In the example above, the drawdown is only 10% until the account moves back above $10,000.

How do you calculate drawdown?

Calculating drawdown involves tracking the change from an account’s highest point to its lowest before a new peak forms. It finds particular use in quantifying the volatility of returns and the risk involved in a trading strategy. Drawdown is typically expressed as a percentage, highlighting the size of a drop relative to the peak.