Master the "Measure of Pain." Learn how to quantify your worst-case historical losses to prepare for future volatility.
Maximum Drawdown is the largest percentage drop from a peak to a trough in your portfolio's value before a new peak is achieved. It is not just about the loss in a single trade; it represents the "peak-to-valley" decline during a specific period of time.
Your ability to sustain a strategy depends entirely on your psychological limit. If your backtested MDD is 30% and you are not mentally prepared to see your account value drop by 30%, you will likely panic-sell at the bottom and abandon a perfectly good strategy.
Example: If your portfolio drops 20%, you need a 25% gain just to get back to breakeven. If it drops 50%, you need a 100% gain to recover. This "recovery math" is why keeping your MDD low is more important than achieving high absolute returns.