The decline from a peak account balance to its lowest point. In prop trading, drawdown limits (daily and maximum) determine how much loss is allowed before a challenge is failed.
There are two types of drawdown in prop firm trading: daily drawdown (maximum loss allowed in a single day, typically 4-5%) and maximum drawdown (total loss from initial balance, typically 8-10%). Drawdown is measured from equity peaks, not from the starting balance. For example, if your $100K account reaches $105K and then drops to $100K, your drawdown is $5K (4.76% from peak), not $0. This distinction catches many traders off guard. Most prop firm challenge failures are caused by drawdown breaches, not by inability to reach profit targets. Proper position sizing is the primary defense against excessive drawdown.