Drawdown is the maximum drop in your capital from a peak to the next trough, before it recovers. If your account reaches €10,000 and then falls to €7,000 before climbing again, the drawdown was 30%.
Most beginners only look at returns. This is a mistake. Two strategies may have the same annual return, but one reaches it with a smooth path and the other with terrifying plunges. The second is far more dangerous, even if the final numbers look alike.
Why? Two reasons. First, the math of recovery is harsh. A 50% drop requires a 100% gain to return to the starting point. The larger the drawdown, the disproportionately harder the recovery.
Second, the human factor. Very few can psychologically endure watching their account lose half of itself. Most give up at the worst possible point, locking in the loss right before the recovery.
That is why a serious system defines the maximum allowed drawdown in advance, per version and per risk profile. It is not a limitation — it is the way to stay in the game long enough for the statistical edge to work.