A high watermark is basically a term which says, "I have to make money for you before I get paid".  It's a point equal to the highest value your account has been under my management.

Example - You start out with 10,000 bitcoin.  I trade your account up to 11,000 bitcoin and I take a 100 bitcoin performance fee, so your balance is 10,900.  The high water mark is 11,000.  I will not receive any bitcoin from you until I push your account above 11,000 bitcoin.