Drawdown

Drawdown measures the decline from the highest point (peak) of your account balance to the lowest point (trough) before a new high is reached.

In prop firm trading, drawdown limits are one of the most critical rules. If your account drawdown exceeds the firm's limit, your account is typically closed ("breached").

Types of Drawdown

• Static Drawdown: Measured from your initial starting balance. Example: A $100K account with 5% max drawdown fails if balance drops below $95K.
• Trailing Drawdown: The drawdown limit moves up with your highest achieved balance but never moves down. This is more restrictive.
• Daily Drawdown: A separate limit on how much you can lose in a single trading day.

Why It Matters

Understanding your firm's drawdown rules is essential for position sizing. Many traders breach their accounts not from bad trades, but from oversizing positions relative to their drawdown allowance.