Drawdown
Drawdown is the decline of a trading account from an equity peak to a subsequent low, measured in currency or as a percentage of the peak.
It is the standard measure of downside experienced along the way, distinct from whether the account is profitable overall. Two dimensions matter: depth, the size of the fall, and duration, the time between the old peak and a new one. Every strategy produces drawdowns; their expected size is what sensible position sizing is calibrated against.
Recovery is asymmetric: percentage losses require larger percentage gains to undo. A 10% drawdown needs roughly an 11.1% gain to reach the old peak, and a 50% drawdown needs 100% — the arithmetic reason loss rules exist at all.
Example
A $100,000 account grows to $104,000, then falls to $98,000 before recovering. The drawdown is $6,000, or about 5.8% measured from the $104,000 peak — even though the account only ever stood $2,000 below its starting balance.
In a prop-firm challenge
Prop firms convert this statistic into hard limits: an account-wide maximum drawdown, commonly 10%; a daily loss limit, commonly 4–5%; and at many firms a trailing drawdown that follows the equity peak, sometimes checked only at the daily close. The same word therefore appears in several different rules with different measurements, and the differences decide which trades survive — they are mapped in drawdown types explained.