Important Note: As of the December 2021 update, HWM will be replaced by Expertise, though the concept is similar.
Also known as HWM, High Watermark System is a system that starts when your character reaches level 60 and governs the power of gear drops you receive in higher level areas.
When an enemy or container drops a piece of gear, it rolls on its Gear Score (GS). As you level, Gear Score normally progresses with character level, so as long as you’re fighting enemies at or above your level, Gear Score should be in a range appropriate for the character.
When a character reaches level 60, this mechanic changes a bit - you gain an upper GS limit (HWM) on drops that gradually increases as more powerful drops appear for you. This upper limit is per-item-type. For armor, it’s based on the slot type (e.g. head armor, chest armor, ring, etc.) and for weapons it is based on weapon type (e.g. sword, hammer, musket, etc.)
Only item drops affect your HWM. The moment the item drops, your relevant HWM is increased, regardless of if the item is equipped, or even picked up. Crafting an item or buying one from the Trading Post does not affect your HWM.
Not all enemies and containers (including Event Reward Containers from Outpost Rush, War, Corrupted Invasion, etc.) are created equal in the case of the HWM system. While there is always a small chance to see a HWM increase when defeating a level 60+ creature or searching a container in a level 60+ landmark, each level beyond 60 has a soft upper limit on the likelihood of an HWM increase. Similarly, Event Reward Containers will respect the current HWM and have a small chance of increasing it. HWM increases are reliable up to GS 530 when defeating Level 61 enemies, but chances of seeing something beyond GS 530 from a Level 61 enemy is significantly lower than it is from a Level 62 enemy. Level 64+ enemies are capable of reliably dropping gear up to GS 600.
Each time a level 60+ enemy is defeated and gear isn't dropped that increases its type's HWM, the chance for an increase goes up the next time an enemy is defeated. Additionally, some enemies, such as those found in Elite Landmarks and Expeditions, have a higher base chance of dropping items that increase HWM. Level 60+ named enemies are even more likely to drop HWM-increasing items, and Expedition Bosses will always drop an item that increases your HWM, making them a reliable way to increase HWM.