Term · Portfolio & Execution
Drawdown
In briefA drawdown is the percentage decline from a peak to the subsequent trough; the maximum drawdown is the largest such loss over the observation period. It measures downside risk and is often especially deep for illiquid small caps with thin order books.
Definition
A drawdown is the percentage decline of a price or portfolio value from a peak to the subsequent trough. The maximum drawdown measures the largest historical loss from peak to trough. It is a metric for downside risk and losses incurred.
How it is calculated
Formula. (trough value − prior peak value) ÷ prior peak value × 100%
Why it matters for small caps
For illiquid nano and micro caps, drawdowns can be especially deep and hard to recover due to thin order books, which should limit position size.
Common misreadings
- The drawdown is confused with annualized volatility, even though it measures a specific peak-to-trough loss.
In the process
Frequently asked
What is the maximum drawdown?
The largest percentage loss from a peak to the subsequent trough over the observed period.
Why is the drawdown relevant for small caps?
Thin liquidity can amplify declines and make recovery harder, which should be considered in position sizing.
What is the difference from volatility?
Volatility measures the range of fluctuation; the drawdown measures the actual loss incurred from peak to trough.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.