Drawdown Explained — What Every Prop Trader Must Know
What Is Drawdown in Prop Trading?
Drawdown is the reduction in your account balance from a peak to a trough. In prop trading, two drawdown limits apply simultaneously: maximum total drawdown (the most you can lose from your starting balance or equity peak over the entire evaluation) and daily drawdown (the most you can lose in a single trading day). Violate either and the account is terminated — regardless of how profitable you were before.
Maximum Drawdown
Maximum drawdown is expressed as a percentage of the starting balance. A 10% maximum drawdown on a $100,000 account means you can lose at most $10,000 before the account is closed. That $10,000 includes all losses across all sessions — it’s a cumulative limit, not a per-day limit.
The critical point most traders miss: maximum drawdown doesn’t reset. If you lose $7,000 on Monday and make $5,000 back on Tuesday, your maximum remaining drawdown is still $3,000 — not $10,000 again. The buffer doesn’t replenish with profits (except in some trailing drawdown models).
Daily Drawdown
Daily drawdown limits how much you can lose in a single calendar day — typically 4-5% of the account. On a $100,000 account with a 5% daily limit, you have $5,000 of loss budget per day. This limit resets each day but doesn’t compound — hitting $4,000 in losses on Monday and $4,000 on Tuesday means you’ve lost $8,000 total, which may be approaching your maximum drawdown limit even though each individual day was within the daily rule.
Static vs Trailing Drawdown
Static drawdown is calculated from your initial starting balance. The floor never moves, regardless of profits. On a $100K account with 10% static drawdown, the floor is always $90,000. Even if you grow the account to $115,000, a subsequent loss only counts against the original $90,000 floor — not against the $115,000 peak. This is the most forgiving model for normal trading volatility.
Trailing drawdown follows your equity peak. If you grow $100,000 to $110,000, the floor moves up to $99,000 (10% trailing). If you then give back $5,000 to $105,000, the floor stays at $99,000. If you give back another $6,000 to $99,000, the account terminates — even though you’re still up $9,000 from your starting balance. Trailing drawdown penalises giving back unrealised gains.
End-of-Day Trailing Drawdown
End-of-day (EOD) trailing drawdown is a modified trailing model where the floor only moves based on your closing balance at end of session — not based on intraday equity highs. If you’re up $5,000 intraday but close the day flat, the floor doesn’t move. This is more forgiving than intraday trailing drawdown and is common among futures prop firms.
Practical Implications
Before starting any evaluation, use the Drawdown Distance Calculator to see exactly how much room you have given your typical trade sizing. The most common evaluation failure isn’t losing money — it’s a single oversized trade on a bad day that violates the daily drawdown rule while the overall account is still profitable.