Markets
Maximum drawdown
The worst fall from a peak to a trough over a period, that is the most an investor would have been down at the low point.
Average returns hide the journey. Maximum drawdown describes the journey: it is the largest loss between a high point and the low that followed, before any recovery.
It is the number that decides whether a strategy is livable. A pattern can end every single year in profit and still have shown a one third loss along the way, which most people would not have held through.
See also
This definition is part of the EPTA5 lexicon, written so that a reader who does not work in finance can follow our market notes without stopping. It is general information and not investment advice. Read the notes.