Drawdown is the decline in your account from its highest point down to a later low, shown as a percentage. It matters because recovery is non-linear: the bigger the drawdown, the disproportionately larger gain you need just to get back to even. Prop firms set strict daily and maximum drawdown limits, so understanding it is essential for challenge traders.
A 20% drawdown ($10,000 to $8,000) needs a 25% gain to recover. A 50% drawdown needs a 100% gain — which is why protecting capital beats chasing it.
This definition is for educational purposes only and is not financial advice. Trading involves risk.