The latest markets news, real time quotes, financials and more. What’s the difference between a drawdown in banking and a drawdown in trading? The term “drawdown” appears in both the banking world and the trading world, but it has very different meanings within each context. In banking, a drawdown refers to a gradual accessing of credit funds, while in trading, a drawdown refers to a reduction in equity. Drawdowns in Banking Within the context of banking, a “drawdown” commonly refers to the gradual accessing of part or all of a line of credit. The arrangement with a bank can be either personal or business-related. An example of the use of drawdown for an individual borrower is a homeowner who applies for a line of credit with a bank, intending to do some major home improvements.
Since he does not plan to do all of the work at once, it is to the borrower’s advantage to only draw down funds as needed from the line of credit that the bank extends to him. A similar arrangement may be made between a lender and a business. For example, a construction company may be approved for financing to build a housing development, but it only gradually accesses the financing funds as portions of the project are completed. The lender may put time or project completion restrictions on such an arrangement. An example of a time restriction would be a stipulation that the borrower can only access a certain percentage of the funds every three months. Drawdowns in Trading In reference to trading, a “drawdown” refers to a drop in equity in a trader’s account. A drawdown is commonly defined as the decline from a high peak to a pullback low of a specific investment or of the equity in a trader’s account.
However, a drawdown is more accurately looked at from a peak high to a trough low to a new peak high. Drawdown magnitude refers to the amount of money, or equity, that a trader loses during the drawdown period. The amount of drawdown is expressed, in regard to equity, as a percentage. It’s calculated from the peak in the account’s equity to the trough low. There can be drawdown even in a trading account that is profitable overall. Drawdown duration refers to the period of time required for a trader to raise an account back to its peak level after a loss has been suffered. 40,000, then the trader would have experienced a two-month drawdown.