Drawdown
The peak-to-trough decline in account value over a period, used to measure the worst-case loss a strategy inflicts on the bankroll.
Definition
Drawdown measures the loss from a portfolio's historical peak to its subsequent trough, expressed in dollars or as a percentage. Maximum drawdown (MDD) is the largest such decline over the entire trading history. It quantifies the worst pain a trader would have experienced if they started at the worst possible time or held through the worst losing streak.
In practice
A predtools bot running a backtest might show a maximum drawdown of $120 on a $500 starting balance (24%). A bot operator uses MDD to calibrate position sizing: if the Kelly-optimal bet causes an MDD that exceeds the operator's risk tolerance, they apply a fractional Kelly multiplier (e.g., 0.25×) to reduce both growth and drawdown proportionally. Monitoring real-time drawdown also triggers circuit breakers: most bots pause trading if the live drawdown exceeds a threshold, preventing a strategy failure from cascading into a full account loss.