What it means
Drawdown is the percentage decline from a portfolio's peak to its lowest subsequent value, before reaching a new peak. Maximum drawdown is the largest such decline over a given history.
Why it matters
Drawdown is what investors actually feel. A strategy with great average returns and a 70% drawdown will lose its investors at the bottom - they pull capital, then miss the recovery. Risk-adjusted returns underweight this human factor.
How to use it
Stress-test strategies with drawdown limits, not just volatility. If a strategy's max drawdown exceeds your psychological limit, you'll abandon it at the worst time. Right-size positions accordingly.
Take it further
Want a worked example or a deeper dive? Ask Rocky how this concept applies to your specific watchlist or trade idea.
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