The quicker the instrument regains its price, the better it is for the trader. When analyzing drawdown from the perspective of an instrument’s price or an account’s value, it is essential to note that the time it takes to recover from the drop is another key characteristic. The bigger it is, the more volatile the particular instrument had been (and will likely continue to be).
In the context of trading, we can also describe drawdowns as downside volatility. That way, traders can better identify whether the particular instrument fits their risk tolerance and investment goals. – Warren Buffet What is a Drawdown in Trading?ĭrawdowns in trading are important because they help traders measure the historical risk of instruments or evaluate their performance.įor example, the drawdown of an ETF, futures contract, or a stock can indicate how risky and volatile the instrument had been in the past. “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” If you learn how to manage them and adopt adequate risk management strategies, you can reduce the effect such situations have on your trading performance. If the market has so many drawdowns, then it is normal for your trading account and the assets in your portfolio to have them.
