For context, let's talk first about signal level as it pertains to analog audio equipment. When talking about an analog audio device, there are a few key specs that are good to know about the device's capabilities to pass a signal. The "dynamic range" is the totality of useable level of which that unit is capable of passing. This is the whole picture from the bottom to the top, the quietest whisper to the boomiest bass drum.
The bottom of your dynamic range is called the "noise floor," or the point at which the self-noise of the unit overtakes the signal. The top of your dynamic range is called the clipping point, where distortion caused by hard clipping becomes so great that it makes the signal unusable. Somewhere towards the top of your dynamic range, you have what's called "line level," which in balanced pro audio applications is equivalent to a reference level of +4dBu, measured on a VU meter as 0 VU or 1.228 volts RMS on a multimeter. The range of level between that +4dBu line level reference point and the clipping point of the device is called "headroom."
Dynamic range and headroom specifically are important because they dictate the working range of an analog device; how hard you can hit the device without causing unpleasant clipping, how quiet of a source you can record without the noise floor of the device becoming an issue and how forgiving the device may be to very dynamic sources like, for instance, a vocalists who is vacillating between quiet murmurs and operatic belting within the same track.
What about headroom as it applies to DAWs and digital converters? Well, that gets slightly trickier.
In a DAW environment, we are working with 0s and 1s. As a result, we have to work in absolutes as it applies to headroom and dynamic range. In analog audio, there's a certain threshold of forgiveness. If you hit the clipping point of say an API 512C mic preamp, well then it may sound only better on your giant Marshall stack driven rock anthem (to a degree, but at some stage if you hit an analog device too hard it just simply snaps your head off). In analog, there's no "end of the earth." In digital audio, by contrast, there is an "end of the earth" and it's not pretty when your signal creeps into this dark and treacherous territory. Literally, the 0s and 1s run out and your signal turns into a square wave when the maximum level within a DAW is exceeded, and that's a nasty sound for which no mixes will benefit.
Now that we've established the key difference between analog and digital in the context of dynamic range, let's look specifically at headroom as it applies to digital audio. With most professional digital converters, one has the ability to move around the +4 dBu reference level within the span of dynamic range offered by the converter. This is referred to as DAW calibration because you are adjusting the input and/or output levels of your converters within the analog realm (usually via a small potentiometer on the device) to reflect the reference level within your DAW. In other words, you can set your converters up to have varying levels of "virtual headroom" within the DAW.
For instance, if you calibrate the reference level of your converters to -20 dBu, which is the default factory setting of several converter brands, that means that if you play back a 1khz tone within your DAW that is -20db on the meter, then you would have an analog level of +4 dBu (measurable as 1.228 volts RMS across pin 2 and 3) at the output of that converter. Likewise, if you sent a +4 dBu 1khz signal from an external source to the input of your converter, then the meter within the DAW would read -20 dBu. In this scenario, you have calibrated the system to have 20 dB of "virtual headroom." As you calibrate the system for more virtual headroom then you are approaching closer and closer to the noise floor, so noise is more likely to become a problem for you on quiet passages.
Inversely, if you calibrate the system for less virtual headroom, so say -16 dBu, then you may run into a situation whereby you are overdriving analog devices connected to your converters, outboard gear, consoles, etc. Generally between -18 and -24 is where you want to be, although some engineers (especially mastering engineers), will have reasons for why they vary from this sort of general practice. There's no right or wrong calibration level, as it all depends on your setup and what you are trying to achieve within the scope of your unique setup.
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