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d2henry Stock

📚 Stock Market Glossary

Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.

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MDD (Maximum Drawdown)

Valuation
💡 Key Takeaway: A risk metric measuring the maximum peak-to-trough drop of an asset or portfolio during a specified timeframe.
Rollercoaster Drop Analogy: Plunging from a 100m peak down to a 20m trough represents an 80% MDD—the exact vertical plunge height that test your stomach's tolerance.
😎 10-Second Show-off Pro Tip for Friends!
Show-off Tip: Warn your trader friends, 'Don't just look at annual CAGR—check the MDD! If a strategy has an MDD of -50%, you will likely panic sell at the absolute bottom!'

📖 Beginner-Friendly Explanation

STEP 1

Core Concept & Meaning

Maximum Drawdown (MDD) calculates the maximum drop from a historical peak to a subsequent trough before a new peak is achieved.

Even if an asset doubles over five years, an MDD of -60% means investors experienced a soul-crushing 60% loss along the ride.

STEP 2

Why It Matters & Mechanism

While high returns attract investors, high MDD leads to panic selling. Risk-conscious investors combine non-correlated assets to limit MDD.

STEP 3

Practical Investment Tips & Pitfalls

  1. Pain Indicator: Measures worst-case historical loss from peak.
  2. Behavioral Risk: High MDD forces emotional panic-selling at lows.
  3. Portfolio Shield: Diversifying to maintain low MDD (e.g. < 15%).
📊 MDD Calculation Formula and Recovery Required Rate of Return
MDD (%) = [(lowest price - highest price) ÷ highest price] × 100
▶ MDD -10% loss ➔ +11.1% needed to recover evenly ▶ MDD -50% loss ➔ +100% (2x) increase required to recover evenly! ▶ MDD -80% loss ➔ +400% (5 times) increase required to recover evenly!

⚖️ Key Comparison at a Glance

CategoryA Technology Stock/Bitcoin (GoMDD)B Asset Allocation Fund (Low MDD)
MDD level-50% – -80% (severe decline)-10% – -15% (moderate volatility)
Investor sentimentHigh possibility of panic selling (stop loss) in a crash marketMind control comfort even in a falling market
Recovery DifficultyThe stock price must rise 2 to 5 times to recover the moneyEven a small increase quickly breaks through the high point again.

📌 Practical Market & Real-World Example

Despite extraordinary long-term gains, NVIDIA experienced three severe drawdowns with MDD exceeding -50% over the past decade.