What is Drawdown in Trading and How it Works?

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Drawdowns in trading are important because they help traders measure the historical risk of instruments or evaluate their performance.

For example, the drawdown of an ETF, futures contract, or a stock can indicate how risky and volatile the instrument had been in the past. That way, traders can better identify whether the particular instrument fits their risk tolerance and investment goals.

In the context of trading, we can also describe drawdowns as downside volatility. The bigger it is, the more volatile the particular instrument had been (and will likely continue to be).

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.

0:00 Music Intro
0:13 Intro
0:53 Disclaimer
1:08 Understanding drawdown
2:55 S&P 500 drawdown
3:41 Drawdown applied to trading
5:22 How it works
7:28 Examples
8:20 Diversifying to mitigate drawdown
9:50 Maximum drawdown
12:40 Drawdown applied to Earn2Trade accounts
14:00 Conclusion

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