What is Drawdown?

A drawdown is how far an investment currently is below its previous high. It is measured from the highest point reached so far, not from the purchase price — so a market can be in a drawdown even if you are still in profit.

Drawdowns have two dimensions: depth (how far it fell) and duration (how long it took to reach a new high). Long, deep drawdowns are what break investors' discipline.

Reducing drawdowns is the main goal of trend-following: being out of the market during the extended declines while staying invested during the long climbs.

By Dr. Harry Hamann