What is drawdown?
Drawdown is the maximum loss allowed on a prop firm account before it is closed. It is expressed as a percentage or a fixed amount, and calculated under three models — static, end-of-day trailing or intraday trailing — with very different consequences.
This is the rule that eliminates the most candidates, far ahead of the profit target. It defines the floor your account must never fall below.
The three models
Static drawdown is measured once and for all against the starting balance. On a $100,000 account with 10 % drawdown, the floor is set at $90,000 and never moves. You can climb to $115,000 then fall back to $91,000 without being eliminated. It is the simplest model to follow and the most favourable to the trader.
End-of-day trailing follows your gains upward, but only records the closing balance. After a day that ends at $105,000, the floor rises to $95,000. Intraday excursions have no effect, which leaves room for the normal breathing of a held position.
Intraday trailing follows the highest point reached during the session, unrealised gains included. Touching $115,000 for a few minutes, without closing the position, permanently raises the floor to $105,000. A pullback to $104,000 ends the evaluation even though the account is still up $4,000.
Balance or equity
Second decisive parameter: drawdown is most often calculated on equity, open positions included. A position sitting on an unrealised loss therefore already counts, even if you have closed nothing. A few firms calculate on balance alone, which is considerably more forgiving.
Freezing the trail
Some firms freeze the trailing once the account has risen above its initial balance by an amount equal to the drawdown: the floor then stabilises and stops following. It is a clause favourable to the trader, worth looking for explicitly in the terms and conditions — it is not universal.
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Related terms
- Breach A breach is the violation of a risk rule that triggers a sanction on the account. Depending on the firm and the rule involved, it suspends the trading day, cancels a payout, or closes the account for good.
- Daily loss limit A daily loss limit is the maximum loss allowed on a single trading day. Separate from total drawdown, it resets each day and breaching it means, depending on the firm, the day is suspended or the account is closed.
- Equity Equity is the value of a trading account with open positions included, unlike balance which counts only closed trades. Most prop firms calculate their risk limits on equity.
- Static drawdown A static drawdown is a loss limit calculated once against the account's starting balance, and never moved. Unlike trailing drawdown, it does not follow gains upward.
- Trailing drawdown A trailing drawdown is a loss limit that follows the account's gains upward: every new high raises the floor the account must not fall below. It exists in an end-of-day form and a far stricter intraday form.