What is it?
Drawdown: Drawdown measures the decline from a running peak to a later value. Maximum drawdown captures the deepest observed decline, while duration and recovery describe how long the path remained underwater and how it returned to a new peak.
What question does it help answer?
How far and how long did a path remain below its prior peak, and what does one maximum number hide?
What can it tell you?
- The depth of losses relative to prior peaks in the observed path.
- How long an observed path remained below its previous high-water mark.
- Whether risk occurred as one large valley or several separate episodes.
What can it not tell you?
- Historical maximum drawdown is not a bound on future drawdown.
- Drawdown depends on the path, sample period, valuation frequency, and starting point.
- One drawdown statistic does not describe liquidity, tail gaps, leverage, or all forms of risk.
See the shape before reading the formula.
The Research Lab compares deep-shock, long-valley, and repeated-valley synthetic index paths. One mode has greater depth, another remains underwater longer, and the repeated path has several recoveries.
Open this concept in Research Lab →Use the idea without turning it into a shortcut.
Keep the context: use this concept to interpret evidence and assumptions. For TraderCockpit controls and workflow details, open Docs. The app is in development; these examples are educational.