Drawdown measures the decline in an account balance, portfolio value, or strategy performance from its most recent peak to its lowest point before a new high is reached. It is typically expressed as a percentage and is one of the key metrics for assessing downside risk.
For example, a maximum drawdown of 15% means that the value at one point fell 15% below its previous peak.
In addition to the maximum drawdown, analysts also consider the time required for recovery and the frequency of drawdowns. For traders and asset managers, drawdown is a central measure used to evaluate the robustness of a strategy and to determine whether losses are within expected parameters or indicate a structural issue.
