Drawdown is a term used in finance to describe the decline in value of an investment or trading account from its highest peak value to its lowest point. It measures the extent of the loss experienced by an investor or trader during a particular time period.
For example, if an investor's portfolio reaches a peak value of $100,000 and then decreases to $80,000, the drawdown would be 20%. The portfolio would need to increase by 25% to reach its previous peak value.
Drawdowns are a common occurrence in financial markets and can be caused by a variety of factors, including market volatility, economic events, and investor sentiment. While drawdowns can be unsettling for investors and traders, they can also provide opportunities for buying assets at a lower price, with the potential for higher returns when the market bounces back.