Drawdown Rules in Prop Trading
Drawdown rules quietly decide which strategies survive and which do not. Two firms can quote the same headline number and behave very differently. This page is the reference: daily vs. maximum, fixed vs. trailing, balance vs. equity, with worked examples and the edge cases that catch people out.
Last reviewed on April 27, 2026
The two limits: daily and maximum
Almost every prop firm enforces two drawdown limits in parallel.
Daily drawdown
The most you are allowed to be down in a single trading day, measured from a reference point that resets at start-of-day. Hit it and the account is suspended or terminated, even if your maximum drawdown is fine.
Maximum (overall) drawdown
The most you are allowed to be down across the life of the account, measured from a reference point set at account open and updated according to the firm's rule. Hit it and the account is terminated regardless of the day's P&L.
Both apply at the same time — you can breach either independently. The binding constraint is whichever is closer to your current equity at any given moment.
The first axis: fixed vs. trailing
The maximum-drawdown reference point is either fixed or trailing. This single distinction explains most of the surprises traders run into.
Fixed drawdown
The floor is set once at account open and never moves. Profits do not raise it; losses do not lower it. Easiest to reason about. Most common in futures prop accounts.
Worked example — fixed
Account: $50,000. Maximum drawdown: $5,000 (fixed). Floor is locked at $45,000.
| Day | Closing balance | Floor | Status |
|---|---|---|---|
| 1 | $50,800 | $45,000 | OK |
| 2 | $52,400 | $45,000 | OK |
| 3 | $48,200 | $45,000 | OK |
| 4 | $44,900 | $45,000 | BREACH — below floor |
Day 4 breaches because closing balance fell below the fixed floor. Day 2's profits did not lift the floor.
Trailing drawdown
The floor moves up with profits but never moves down. As the account grows, the protected level grows with it. The harder version updates intraday on unrealised equity; the gentler version updates only at end-of-day on realised balance.
Worked example — end-of-day trailing
Account: $50,000. Trailing drawdown: $5,000, EOD on realised balance.
| Day | Closing balance | Floor | Status |
|---|---|---|---|
| 1 | $50,800 | $45,800 | OK |
| 2 | $52,400 | $47,400 | OK |
| 3 | $48,200 | $47,400 | OK — floor stayed |
| 4 | $47,300 | $47,400 | BREACH — below floor |
The floor never moves down. By Day 4 you have lost less from peak than in the fixed example, yet you've breached because the floor ratcheted up after Day 2's profit.
Intraday trailing — the harder version
Some firms calculate the trailing floor against the highest unrealised equity reached during a session, not against the closing balance. A trade that briefly went to a $60,000 unrealised peak on Day 2 in the example above could have raised the floor to $55,000 — making Day 3's $48,200 close an immediate breach.
If you cannot tell from a firm's public rulebook whether trailing is intraday or end-of-day, that is itself a signal. Email support and ask before paying for the evaluation.
The second axis: balance-based vs. equity-based
The drawdown calculation looks at one of two things:
- Balance-based — the account balance from closed trades only. Open positions do not count, even if they are showing a large unrealised loss.
- Equity-based — balance plus the unrealised P&L of open positions. Any open drawdown counts immediately.
The same headline rule labelled "10% drawdown" is much tighter under equity-based calculation. Open a position, watch it dip 4% before recovering, and on equity-based rules you may already have used a substantial chunk of your buffer — sometimes enough to breach without ever closing a losing trade.
Worked example — equity vs. balance
Account: $50,000. Trailing drawdown: $5,000 EOD. Floor at start of day: $46,000.
You enter a long position at the open. Mid-session, the position is showing -$4,500 unrealised, but you hold and it closes the day at -$200 realised.
| Calculation | Result |
|---|---|
| Balance-based | OK — closed P&L only -$200, balance $49,800, well above floor |
| Equity-based, EOD | OK — close-of-day equity is $49,800, above floor |
| Equity-based, intraday | BREACH — intraday equity touched $45,500, below the $46,000 floor |
Same trade, three different outcomes — driven entirely by the rule's reference point.
Daily drawdown — the same axes, applied per day
Daily drawdown has the same fixed/trailing and balance/equity choices, but the reference point resets at start of day rather than at account open. A 5% daily drawdown on a $50,000 account is $2,500 per day; the firm's documentation will specify whether that is measured from yesterday's closing balance, today's starting balance, today's highest equity, or somewhere else.
For traders who scalp or take many small trades, daily drawdown is usually the binding constraint. For swing traders who run positions across multiple days, the maximum (overall) drawdown is the one that matters most — daily drawdown rarely bites if positions are small relative to account size.
Edge cases that catch people out
- Commissions counted in drawdown. Some firms include commissions and swap fees in the equity calculation, others do not. Check whether your scalping volume's per-trade cost can push you closer to a daily breach.
- Inactivity adjustments. A few firms reset trailing floors after long inactivity. Most do not. Read the rulebook — do not assume.
- Weekend gap risk on equity-based rules. If you hold over a weekend and Monday opens with a large gap against you, equity-based rules can register a Monday-open breach before you have a chance to close.
- Profit-split day = balance reset? Some firms reset the trailing drawdown reference point after a profit payout. Others continue trailing from the running peak. Big difference for compounders — verify how the firm handles this.
- "News-trading" buffer rules. A few firms widen drawdowns or tighten them around scheduled news. Confirm the exact windows.
Sizing positions to the drawdown rule, not the account
The most consistent mistake retail traders make on funded accounts is sizing positions to the dollar account balance rather than to the firm's drawdown limit. The binding constraint is the drawdown floor, not your equity.
A useful rule of thumb: a single losing trade should consume no more than 10–20% of the daily drawdown buffer. So on a $50,000 account with a $2,500 daily drawdown, a single trade should risk $250–$500. That is what produces a comfortable rebound day if you start with three losers — not the equity-based "1% of $50,000 = $500 per trade" calculation, which can be too aggressive once daily drawdown is the binding constraint.
For maximum-drawdown sizing, the same logic applies on a longer horizon: a string of losing trades should consume the maximum drawdown buffer over many days, not a few sessions.
How to read a firm's drawdown disclosure
Open the rulebook. Find the sections labelled "Daily Loss Limit" or "Daily Drawdown" and "Maximum Drawdown" or "Overall Loss Limit". For each, write down:
- The dollar value (calculate it yourself, do not trust the headline percentage).
- Fixed or trailing.
- Balance-based or equity-based.
- Reference point: account open / day start / running peak / closing balance.
- Update timing: intraday, end-of-day, end-of-period.
- What happens to the floor at a payout.
If any of these is unclear after a careful read of the rulebook, the firm has not disclosed enough — and that is data. Either ask support and keep the answer in writing, or move on.
Where to go next
Use the comparison tool to see how specific firms label their drawdown rules — but always re-verify the underlying mechanics on the firm's site. The glossary has shorter definitions for the related terms. The futures hub covers fixed vs. trailing drawdown specifically in the context of futures evaluations.