Drawdown
Risk & psychologyThe decline from a portfolio’s peak value to its subsequent trough.
In plain terms
Know your system’s worst historical drawdown before trading it, because you will live through it.
1492 terms
Glossary
Every term is defined twice: once the way a filing would put it, and once the way somebody would explain it to you across a table. The second one is usually the one that sticks.
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Drawdown capacity
Risk & psychologyHow large a fall in portfolio value can be absorbed without forcing a sale or altering your plans.
In plain terms
Equity does not become riskier as you age; this falls. The same 40% fall is a few months of saving at 25 and a permanent reduction in what can be spent at 58.
Maximum drawdown
Risk & psychologyThe largest peak-to-trough fall in an equity curve.
In plain terms
Return is what a report advertises; drawdown is what you actually live through.
Calmar ratio
Risk & psychologyAnnualised return divided by the maximum drawdown over the same period.
In plain terms
The most intuitive risk-adjusted measure for an individual: how much return you were paid for the worst fall you had to sit through.
MAR ratio
Risk & psychologyAnnual return divided by maximum drawdown.
In plain terms
One of the more honest single numbers in a strategy report.
Recovery
Risk & psychologyRebuilding capital and process after a significant drawdown.
In plain terms
Restart at a quarter size and judge yourself on twenty rule-following trades, not on getting back to the old peak.
Recovery period
Risk & psychologyThe time taken to climb from a drawdown low back to the previous high.
In plain terms
Depth frightens people; duration breaks them. Most investors quit in year four of a long recovery, not at the bottom.
Scaling down
Risk & psychologyCutting position sizes after a defined drawdown, and keeping them small until performance recovers.
In plain terms
Not an admission that the system has stopped working. Smaller size buys you time to find out whether the environment has changed.
Counterfactual
Risk & psychologyThe imagined outcome of a decision you did not take.
In plain terms
Always edited for the ending. You never lived through its drawdowns.
Geometric growth
Risk & psychologyCompounded growth, where each period multiplies the last rather than adding to it.
In plain terms
Why bet size matters non-linearly: a 50% loss needs a 100% gain, so a large drawdown removes more future growth than the arithmetic suggests.
Kill criteria
Risk & psychologyPre-written conditions under which a strategy will be retired.
In plain terms
Decide them while calm. Deciding during a drawdown is how working systems get abandoned at the bottom.
Path dependency
Risk & psychologyThe property that the order of returns, not just their values, determines the outcome.
In plain terms
Multiplication does not care about order. Drawdown limits, margin calls and your own nerve do — which is why sequence decides whether you were still there for the good part.
Risk premium
Market basicsAlso called: Equity risk premium
The extra return an investor expects for holding a risky asset rather than a risk-free one.
In plain terms
Compensation for enduring drawdowns, not a payment that arrives on schedule. It shows up over decades and can be absent for years at a stretch.
Smallcap
Market basicsCompanies ranked 251 and below by market capitalisation.
In plain terms
Everything else, from future compounders to shells. Thin liquidity and brutal drawdowns.
Strategy correlation
Risk & psychologyThe extent to which two systems lose money at the same time.
In plain terms
Diversification is defined by whether drawdowns coincide, not by whether the rules look different.