A drawdown is the peak-to-trough decline during a specific recorded period of an investment, fund or commodity.

A drawdown is usually quoted as the percentage between the peak and the subsequent trough. Those tracking the entity measure from the time a retrenchment begins to when it reaches a new high. This drawdown method of recording is useful because a valley can't be measured until a new high occurs.

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Once the investment, fund or commodity reaches a new high, the tracker records the percentage change from the old high to the smallest trough. Drawdowns help determine an investment's financial risk.

Both the Calmar and Sterling ratios use this metric to compare a security's possible reward to its risk. During volatile markets, and markets that have a possibility of a correction, drawdown is a serious concern for retirees. Many are starting to look at the drawdown of their investments, from stocks to mutual funds, and what does drawdown mean in forex their possible maximum drawdown MDD potential.

Forex risk reward 1 1 present a significant risk to investors when considering the uptick in share price needed to overcome a drawdown.

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Retirees in particular feel this risk, if they are doubling down on the drawdown economics as they withdraw further funds from the principal of their investments to fund their retirements. In many cases, a drastic drawdown, coupled with continued withdrawals in retirement can shorten retirement funds considerably. Typically, drawdown risks are mitigated by having a well-diversified portfolio and knowing the length of the recovery window.

However, retirees need to be especially careful about drawdown risks in their portfolios.

Diversifying a portfolio what does drawdown mean in forex stocks, bonds and cash instruments can offer some protection against a drawdown, as market conditions affect different classes of investments in different ways.

Stock price or market drawdown should not be confused with retirement drawdown, which refers to how retirees should withdraw funds from their pension or retirement accounts. Dictionary Term Of The Day.

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What is drawdown? | Forex for Beginners

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