In plain English
What Drawdown means
Drawdown shows how far value has fallen from the most recent high-water mark. It can be measured on an open position, an account balance, or a performance series over time. The concept is useful because two accounts with the same ending return can have very different paths of loss along the way.
Why it matters
Drawdown helps traders and investors see downside path risk, not just final return. Large drawdowns can pressure margin, reduce trading flexibility, and make recovery harder because losses must be recouped from a smaller base.
Example
If an account rises from $10,000 to $12,000 and later falls to $9,600, the drawdown from the peak is $2,400, or 20%. This is a simplified example that ignores deposits, withdrawals, and fees.
Quick answers
Common questions
Can drawdown be measured in dollars and percent?+
Yes. Percent is common for comparing accounts of different sizes, while dollars show the absolute amount lost from the peak.
Does drawdown only apply to closed trades?+
No. It is often used on live account equity or portfolio value, so unrealized losses can be part of the calculation.
Sources