In simple terms
«I am in drawdown» means the account is below its recent equity high. Formally, drawdown runs from a peak in capital to the current level or a later trough. In everyday trading talk, it often means a losing streak or an open position below entry.
What to distinguish
Drawdown is not the same as one losing trade. It can combine several losses, fees, or withdrawals, and it can be temporary or permanent. The percentage depends on the starting peak: losing 1,000 from 10,000 is not the same as losing 1,000 from 100,000. Record the peak, trough, and time needed to recover.
Limits and links
A drawdown limit set before trading can reduce size or pause a system when its assumptions fail. It cannot remove risk or predict the next trade. For the formal measure, see drawdown and drawdown control.
Sources
- Investopedia, “Drawdown” — defines a fall from a peak and the recovery required.
- CFA Institute Inside Investing, “Sculpting Investment Portfolios: Maximum Drawdown and Optimal Portfolio Strategy” — defines drawdown and maximum drawdown as portfolio-risk measures.