The plainest possible description
Your account reaches $12,000. Some months later it is at $9,600 before it starts climbing again. That fall from the high point to the low point is $2,400, and as a share of the high point it is 20%.
That is the drop. Not the difference between where you started and where you ended, but the worst fall from any peak to any later trough along the way. It is called maximum drawdown, and it is the single most useful risk number for an ordinary person.
The reason it matters more than most measures is that it corresponds to a real experience: the moment you open the app and see a number far below the best one you remember.
Why this is the number that ends plans
People rarely abandon an investing plan because a ratio disappointed them. They abandon it during the drop, at the point where continuing feels foolish and stopping feels like relief.
This is where the damage happens, because selling near the bottom converts a temporary fall into a permanent loss. The plan might have recovered fully four months later, but you were not there for it.
So the useful way to read this number is not as a statistic but as a rehearsal. If a test says the account fell $2,400 at its worst, sit with that figure. Picture opening your phone and seeing it. If you know you would have sold, then the plan is wrong for you, and knowing that now is worth a great deal.
A worked example over five years
A plan starts at $10,000. In year two it reaches $11,800. Then a difficult stretch takes it down to $9,100 before it recovers. The fall is $2,700 from that peak, which is about 23%.
Later it climbs to $14,200 and dips to $13,000, a fall of $1,200 or about 8%. It finishes at $13,850 after five years.
The maximum drawdown is the worst of those, so 23%, or $2,700 in the money you could picture. Notice that the plan finished up nicely and still contained a stretch where you were $2,700 below your best. Both facts are true at once, and the second one is the one you have to be able to survive.
How long the hole lasts
Depth is only half of it. The other half is how long you spent below your previous high, which is sometimes called the recovery period and matters just as much psychologically.
A 20% fall that recovers within three months is uncomfortable. The same 20% fall taking two years to recover is a different experience entirely, because you spend two years watching an account that is worth less than it once was and wondering whether you were wrong.
When you read a test result, look at the shape of the line, not only the worst point. A chart that spends long periods below its previous high is telling you something the single number cannot.
What you can do about it
You can set a rule that sells a stock once its loss reaches a level you choose, which limits how much any single holding can hurt the account. This trims the depth, and it costs you something: a stock that would have recovered gets sold before it does.
You can hold more stocks so no single one dominates. You can cap how much of the account any one stock may take. You can set a limit for the whole account, so that if it falls past a level you chose, everything sells and the plan pauses until you decide what to do.
Every one of these trades away some return for a shallower drop. There is no arrangement that removes falls entirely, and any product implying otherwise is not being honest with you.
Reading it in Stax
Every history test reports the worst drop in dollars alongside the final balance, because a balance without its worst moment is half a story.
A worthwhile exercise before deploying anything: take the worst drop figure, subtract it from your intended starting amount, and ask whether you would genuinely have held on at that number. If the honest answer is no, change the plan now rather than discovering it later with real savings involved.