Drawdown

Drawdown measures how far an account's equity has dropped from its highest point before recovering. It is the cleanest risk metric for evaluating trading systems because it captures both magnitude and duration of pain. Maximum drawdown is the worst peak-to-trough drop ever recorded; current drawdown is the gap from the most recent equity high. Most professional risk managers cap acceptable strategy drawdown at 20-30%; anything above 50% signals fragile risk control or excessive leverage.