Drawdown

In finance, the term ‘drawdown‘ describes the movement of the price of a financial instrument, or a portfolio of investments, over a given time period. Specifically, it is calculated as the difference between the maximum value (referred to as peak or maximum drawdown) and the minimum (trough or minimum drawdown) in that timeframe.

Drawdowns are mostly expressed in percentage terms, but in some cases they may be stated in absolute monetary terms, i.e. with reference to the unit of fiat currency or cryptocurrency considered.

The formula for calculating a percentage drawdown is as follows: 

Drawdown% (DD) = ((Pmax – Pmin) / Pmax) * 100

In this case, Pmax corresponds to the maximum recorded in the period under consideration, while Pmin is the minimum in the same timeframe. 

For example, if in a bear market the peak value of a crypto corresponded to €100 and the price fell to a minimum of €50, the drawdown would be 50%. The calculation of drawdown is used in trading to measure the volatility of an asset and the associated risk, in order to compare its performance with other types of investment.

Correlated words

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Parameters

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Golden Cross

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Average True Range (ATR)

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Dividend

A Dividend is a share of profit distributed to shareholders of a company, usually paid periodically as a return on investment.

Diversification

Diversification in investment involves strategically including various assets with different characteristics to reduce portfolio risk.

Floor price

The Floor price is the lowest price at which an asset, such as an NFT or stock, is currently available for purchase on the market.

Bitcoin Dominance

Bitcoin Dominance measures the proportion of Bitcoin's market capitalisation in relation to the total market cap of all cryptocurrencies.

Pair

In trading, a Pair involves two currencies exchanged against each other, commonly seen on cryptocurrency and forex exchanges.

Price action

Price action refers to the movement and behaviour of a financial instrument's price over time, used for predictive analysis in trading.

Relative Strength

Relative Strength is a technical analysis tool comparing the price performance of two cryptocurrencies to evaluate their market strength.

Breakout

A Breakout in trading occurs when the price surpasses a defined resistance or support level, leading to increased volatility and activity.

Bull Run

A Bull Run is a market phase marked by a sustained upward price trend, often reflecting widespread positive sentiment among investors.

Rally

A Rally is a rapid and significant increase in an asset's or market index's price, driven by a surge in demand from investors.

Fakeout

A Fakeout in the market occurs when the actual price trend diverges from investor expectations, leading to mistaken trading decisions.

Market Mover

A Market Mover is a factor or event capable of significantly influencing a financial market's direction and price levels.

Mutual Funds

Mutual Funds pool capital from multiple investors to invest collectively in diversified portfolios of assets.

Bear Trap

A Bear Trap occurs in a bullish market, presenting a temporary downward price movement that can mislead investors.

Bull Trap

A Bull Trap is a deceptive upward price movement in a bearish market, giving the false impression of a market recovery.

Volatility

Volatility in finance refers to the extent of price fluctuations a financial instrument experiences over a period.

Supply and demand

Supply and demand are fundamental economic forces determining the price and availability of goods and services in the market.

Volume

Volume indicates the total amount of a cryptocurrency traded within a specific time frame, reflecting market activity.

Market Trend

Market Trend signifies the prevailing direction of financial markets, identified over a substantial duration for investment analysis.

Trading

Trading is buying and selling financial assets in markets to profit from price movements and market trends.

Stop Order

A Stop Order is a conditional trade tool in markets, allowing investors to buy or sell assets when prices reach a set level.

Slippage

Slippage is the variation between a trade's expected and executed price, often occurring in fast-moving or illiquid markets.

Support and resistance

Support and Resistance are technical analysis tools identifying price levels where an asset's price trend may pause or reverse.

ROI

ROI, or Return on Investment, quantifies the performance of an investment by comparing profits to its original cost.

Pump&Dump

Pump&Dump is a manipulative market strategy that artificially inflates cryptocurrency prices for the benefit of the initiators.

Prediction Market

Prediction markets are exchange-traded platforms that predict the outcomes of future events, reflecting market sentiment and speculations.

Order Book

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Oracle

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Moon

The term 'Moon' describes a rapid and significant surge in a cryptocurrency's price, indicating bullish market sentiment.

Market Order

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Market Maker

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Market Cap

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Limit Order

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Futures Contract

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FUD

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Circulating Supply

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Forex

The Forex (Foreign Exchange) Market is a global platform for trading fiat currencies, operating 24/7 with high liquidity.

FOMO

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ETF

ETFs (Exchange-Traded Funds) are passively managed funds that replicate the performance of a benchmark index, offering broad market exposure.

Buy Wall and Sell Wall

Buy Wall and Sell Wall represent significant purchase or sale demands at a specific price in cryptocurrency trading.

Bull Market

A Bull Market is a period where prices consistently rise, often driven by investor confidence and economic optimism.

Break-Even point

The Break-even point is the financial state where total revenues equal total expenses, indicating neither profit nor loss.

Bid and Ask

In trading, 'Bid' and 'Ask' represent the prices at which buyers and sellers are willing to trade an asset in the order book.

Benchmark

A Benchmark is a standard or point of reference against which the performance of a financial instrument or market can be measured.

Bear Market

A Bear Market is a phase in the market characterized by declining asset prices and typically reflecting widespread pessimism.

ATH and ATL

ATH (All-Time High) and ATL (All-Time Low) represent a cryptocurrency's highest and lowest historical price points.

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