Portfolio Drawdown

A portfolio drawdown is the peak-to-trough decline in the value of an investment portfolio during a specific period. It measures the severity of losses experienced by an investor before the portfolio recovers to its previous high.

In crypto-trading, drawdowns can be extreme due to the high volatility and the presence of leverage. Tracking maximum drawdown is a standard way to evaluate the risk-adjusted performance of a strategy.

A strategy that generates high returns but suffers massive drawdowns may be considered too risky for many institutional investors. Reducing drawdown risk involves diversification, hedging, and disciplined position sizing.

It is a critical metric for understanding the psychological and financial toll of a trading strategy. It quantifies the "worst-case" experience for an investor.