Trailing Drawdown

Trailing drawdown is a dynamic risk limit used by many prop firms. Unlike static drawdown (measured from starting balance), the trailing drawdown "follows" your highest achieved balance.

How It Works

1. You start with a $100K account and a $3K trailing drawdown
2. Your max loss level starts at $97K
3. You grow the account to $103K — the max loss level trails up to $100K
4. If the account drops back to $101K, the max loss level stays at $100K (it never moves down)

Balance-Based vs Equity-Based

Some firms trail based on realized balance (closed trades only), while others trail based on open equity (including unrealized P&L). Equity-based trailing is significantly more restrictive because even momentary spikes in profit raise the floor.

Strategy Implications

Traders under trailing drawdown rules need to be careful about "locking in" early profits. A big winning day early on can make the drawdown extremely tight for subsequent trading.