What is Drawdown?
The peak-to-trough decline of a portfolio or stock before it reaches a new high.
Formal Definition
A drawdown is the percentage decline from a prior peak in value down to a subsequent trough, measured until a new peak is set. It captures the loss an investor actually lives through during a losing stretch, and unlike volatility it counts only the downside. Any peak-to-trough dip is a drawdown; the deepest one over a period is the maximum drawdown.
In Simple Terms
It is how far an investment falls from its highest point down to its lowest point before it climbs back. It answers the gut-check question: if I had bought at the very top, how far would I have watched my money drop?
Example
A portfolio that peaks at $100,000 and falls to $85,000 is in a 15% drawdown until it sets a new high.