What is Drawdown?

A drawdown is a metric used to classify the decline in financial markets during a certain period. Drawdowns use a peak-to-trough approach in percentage terms. For example, if a specific market or stock drops from an initial position of $100,000 to $60,000, then rallies back above the initial position, the drawdown would be 40%. Market drawdowns are important to consider when a trader or fund manager is managing a large number of assets in an investment portfolio or fund. A drawdown is generally not considered a loss, but merely represents an asset's movement from its peak (high) to trough (low).