Don't panic if the values of your portfolio suddenly drop by a few percentage points, because there's 'Maximum Drawdown (MDD)' for you. Maximum drawdown is a tool that can help you determine when the risk has gone too far, and when the time to sell is right.With MDD, you'll be able to confidently say that your portfolio is taking full advantage of opportunities for growth in the market.Sell when you see maximum drawdown! That's just what a lot of investors do. They're tired of seeing their investments suffer losses and they want to do something about it. But is that the right thing to do?Maybe not, but at least you have an idea what MDD is, right? It measures the maximum loss observed over a given period. The time frame varies from person to person depending on their risk appetite and investment horizon, but it generally ranges between 3 months and 1 year.Excessive drawdown or maximum drawdown is a sign of market instability, and it can't be ignored. A lot of stock market experts consider it as an indicator to determine whether the market is going up or down. MDD is key because it helps you understand what you should expect when evaluating price bubbles and crashes. If prices drop quickly from peak to trough and fail to rise again soon thereafter, we call that a crash (see: How To Tell When There's A Market Bubble).
