Drawdown measures how far a series has fallen from its previous high. If a portfolio, index, or simulated strategy reaches 100 and then falls to 80, the drawdown is 20 percent. Drawdown is one of the most intuitive risk metrics because it answers a human question: how painful did the decline become before recovery?
The maximum drawdown is the worst peak-to-trough decline in a period. It is not the same as volatility. Volatility measures typical variation. Drawdown captures the worst experienced decline. A series can have modest day-to-day volatility but still suffer a large drawdown if losses accumulate steadily.
Why students should learn drawdown early
Most people underestimate how difficult recovery is. A 10 percent loss needs about an 11 percent gain to recover. A 50 percent loss needs a 100 percent gain. Drawdown helps students see why risk control is not just a professional topic. It is basic arithmetic.
Drawdown in backtests
Backtests often show attractive average returns while hiding long periods of stress. A strategy that looks good on a final chart may have spent years below its peak. Reading drawdown forces you to examine the path, not just the ending number.
Limitations
Drawdown depends on the period being studied. A short backtest can miss major crises. A long backtest can include market structures that no longer exist. Drawdown also does not explain why the fall happened. It is a measurement, not a diagnosis.
On REGIME FORGE, drawdown is shown as a risk lens. It is never used as a buy or sell instruction.