Drawdown
Drawdown refers to the reduction in a trading account's value from its peak to its subsequent lowest point, expressed as a percentage. It is a key measure of risk and reflects how much capital a trader loses before recovering to a new high. A maximum drawdown quantifies the worst historical loss experienced by a strategy. Managing drawdown is critical to long-term success β large drawdowns require exponentially greater gains to recover. Responsible traders set maximum drawdown thresholds and adjust position sizing to protect their capital during adverse market conditions.