What is 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.
Trailing is the most misunderstood mechanism in the industry, and the one that produces the strongest sense of unfairness.
The principle
Unlike the static model, the floor is not fixed: it recalculates from the highest point the account has reached. On a $100,000 account with a 10 % drawdown the floor starts at $90,000. Take the account to $110,000 and the floor rises to $100,000. It never comes back down.
The consequence is counter-intuitive: the more you gain, the less room for error you hold in relative terms. A trader who patiently builds an 8 % gain ends up with the floor pinned to the starting balance, without having withdrawn anything.
End-of-day against intraday
The end-of-day version records only the closing balance. An excursion to $112,000 during the session, closed back at $105,000, lifts the floor to $95,000 and no further. That is a reasonable compromise between protecting the firm and remaining playable.
The intraday version follows the highest point touched during the session, unrealised gains included. The same path puts the floor at $102,000. A profit you never banked has permanently raised your elimination threshold. It is by far the harshest rule on the market.
Trading under a rising floor
Two adaptations recur among long-standing funded traders. The first is taking profits earlier, rather than letting a position run toward a high the trailing floor will record against you. The second is reducing position size as the account grows, precisely to preserve room against a floor that keeps climbing.
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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.
- 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.
- 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.