Overview
The drawdown is the measure of the decline from a historical peak in some variable (typically the cumulative profit or total open equity of a financial trading strategy).
1. How low it goes (the magnitude)
In finance, the use of the maximum drawdown is an indicator of risk through the use of three performance measures: the Calmar ratio, the Sterling ratio and the Burke ratio. These measures can be considered as a modification of the Sharpe ratio in the sense that the numerator is always the excess of mean returns over the risk-free rate while the standard deviation of returns in the denominator is replaced by some function of the drawdown.
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2. How long it lasts (the duration)
Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn't always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn't have to be.
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Credit offered
Where an amount of credit is offered, a drawdown against the line of credit results in a debt (which may have associated interest terms if the debt is not cleared according to an agreement.)
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Funds offered
Where funds are made available, such as for a specific purpose, drawdowns occur if the funds – or a portion of the funds – are released when conditions are met.
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The source notesEvidence & further reading2 sources
- Drawdown (economics) — Wikipedia, revision 1348770956 Wikipedia contributors · Reference source · accessed 2026-09-22
- "What Is A Drawdown? – Fidelity". www.fidelity.com. January 2001. Retrieved 2019-08-04. fidelity.com · Reference source · link imported 2026-09-22
Selected and reformatted from Drawdown (economics), by its contributors, under CC BY-SA 4.0. Revision 1348770956. Sections and formatting have been shortened; the linked revision provides the full context and contributor history. This reference text remains under the same license. Its additional citation links are imported from that revision and have not been independently checked here.