Drawdown is the largest drop from your capital peak. Without tracking it, you may find yourself in a hole too deep to recover from.
Institutional Standards
Due to the asymmetry of recovery, deeper drawdowns get exponentially harder to undo. Many prop firms halt trading if a specific monthly drawdown limit (e.g., 5–10%) is exceeded. For individuals, knowing your numerical drawdown limit is the foundation of risk control.
Practical Check
Weekly, note "how far below peak am I." If you approach 80% of your max limit, take immediate defensive action, such as halving your position size.