A drawdown measures how much an investment falls from its highest value to its lowest point. It shows the size of the drop, not how fast it happened.
Think of it like losing progress after reaching a checkpoint. The deeper the drawdown, the harder it is to recover and get back to the previous high.
Drawdown highlights downside risk. Two investments can deliver similar long-term returns but feel very different depending on how deep their drawdowns are.
Understanding drawdowns helps investors choose strategies they can actually stick with. Large drawdowns increase emotional pressure and often lead to poor decisions driven by fear rather than logic.
Drawdown is usually expressed as a percentage:
- Maximum drawdown shows the worst peak-to-trough loss
- Smaller drawdowns are easier to recover from
- Larger drawdowns require disproportionately higher gains to break even
- Drawdowns tend to deepen during bear markets
Comparing drawdowns helps evaluate risk beyond returns alone.
A common mistake is ignoring drawdown during strong performance. Gains feel great until a sudden drop reveals hidden risk.
Another error is assuming drawdowns are temporary by default. Without a solid strategy or recovery path, losses can persist longer than expected.
On Stoxcraft, drawdown appears in stock analysis, performance breakdowns, and news coverage.
It also feeds into the Risk Score on Stoxcards, where drawdowns help quantify downside exposure. In addition, drawdown is referenced in Academy content explaining risk, volatility, and how different strategies behave during market stress and downturns.