Glossary / Drawdown

Drawdown

Drawdown is the maximum amount a trading account is allowed to lose, measured from its starting balance or its highest point, before the account is breached and trading stops. It is the single rule that does the most work in a prop firm’s risk model, and the one that decides most challenge and funded account failures.

Why drawdown exists

A prop firm is underwriting a trader’s access to its capital. Drawdown is the mechanism that caps how much of that capital any single trader can lose before the firm cuts its losses. Every other rule on a challenge, from minimum trading days to news restrictions, exists mainly to stop a trader gaming their way around this one. Understanding drawdown is understanding most of what a prop firm actually cares about.

The three main types

Static drawdown (max drawdown) is fixed at a set distance from the account’s original starting balance and does not move as the account grows. It is the simplest form, and generally the most forgiving once an account is in profit, since the loss limit stays where it started.

Trailing drawdown moves up as the account’s balance or equity reaches new highs, which means the maximum loss allowed in dollar terms actually shrinks as the account becomes more profitable. It is designed to lock in the firm’s downside as a trader’s unrealised edge grows, which is also why it has a reputation for catching traders out right when they feel safest.

EOD (end of day) trailing drawdown is a version of trailing drawdown that only recalculates once per day, based on the account’s balance at market close, rather than moving in real time. Intraday trailing drawdown recalculates continuously, including unrealised profit on open positions, which makes it the tighter and less forgiving of the two. See the trailing drawdown entry for more on how these two compare.

What it actually means for you

The type of drawdown a firm uses tells you more about how it prices risk than almost anything else in its terms. A firm offering intraday trailing drawdown on a cheap account is pricing in tighter control because it is taking on more risk per trader; a firm offering static drawdown at a higher price point is doing the opposite. Neither is automatically the better deal, but knowing which one you are trading under changes how you should actually trade the account, not just whether you pass the challenge.