Drawdown

Understanding Drawdown

Drawdown is the measure of peak-to-trough decline in a trading account’s equity or balance. It represents the temporary or permanent loss of capital during a trading career.

Types of Drawdown in Prop Trading

Proprietary trading firms track drawdown using specific metrics:

• Daily Drawdown: Calculated from the account equity/balance at the start of the daily broker reset (usually midnight CE(S)T).
• Maximum Overall Drawdown: The maximum absolute decline allowed from the initial starting balance of the account (e.g., $10,000 drawdown limit on a $100,000 account).
• Trailing Drawdown: A drawdown limit that trails your highest achieved account equity, common in futures prop firms.

Why Drawdown Matters

Drawdown management is the ultimate metric of a professional trader. The deeper your drawdown, the harder it is to recover:

• A 10% loss requires an 11% gain to break even.
• A 20% loss requires a 25% gain to break even.
• A 50% loss requires a 100% gain to break even.