Drawdown
Drawdown is the peak-to-trough decline in account value, expressed as a percentage. A 20% drawdown requires a 25% gain to recover. Drawdowns compound non-linearly, making risk management critical.
Definition
Drawdown measures the largest loss from a previous peak before a new peak is reached. It's often overlooked in favor of total return, but it's far more important for sustainability. A strategy with 20% annual returns but 40% max drawdown is often worse than one with 12% returns and 8% drawdown — the second is sleepable, the first isn't. Recovery math is brutal: 50% drawdown requires 100% gain to break even.
Formula
Drawdown % = (Peak Value − Current Value) ÷ Peak Value × 100
Example
Account peaks at $12,000 then falls to $9,000. Drawdown = (12,000 − 9,000) ÷ 12,000 = 25%. Recovery requires +33.3%.