A trader on an evaluation account is up 4% for the month with one position open. The position moves against them, unrealised, and the account is closed for a rule breach before they have clicked anything. They had read the maximum loss figure. What they had not read was whether it applied to balance or to equity, and whether the floor sat at the starting deposit or trailed the highest point the account had reached.
Drawdown is a family of measurements, not one number. Every version answers the question of how far the account has fallen, and they differ on two axes: what the fall is measured from, and whether open positions count.
| Term | Measured from | Behaviour |
|---|---|---|
| Absolute drawdown | The initial deposit | Fixed floor for the life of the account, ignores later profits |
| Relative or trailing drawdown | The highest balance or equity reached | The floor rises with new highs, so profits raise the bar |
| Maximum drawdown | Any prior peak | The single deepest peak to trough fall in the record |
| Daily drawdown | A reference set at the start of each trading day | Resets every day at the firm's server midnight, not yours |
Balance or equity, and why it decides everything
A balance rule counts only closed trades. A rule written against equity includes floating profit and loss, so an open position that is temporarily deep in the red counts against you immediately. The same trade under the same nominal limit either breaches or does not, purely on this wording.
Equity based rules are the norm at prop firms, for an obvious reason: a balance rule would let a trader hold an unlimited losing position indefinitely and report a clean balance. Understanding which applies is the first thing to check in any set of funded account rules, before the profit target and long before the payout split. It also decides how you should think about holding through news, because the spike wick that never becomes a closed loss can still be a breach.
Trailing drawdown, and the version that locks
Trailing is where profitable traders get caught. If the floor sits a fixed distance below the account's high water mark, then making money moves the floor up behind you. Reach a peak, give back part of the gain, and you can breach while still ahead of where you started. Traders describe this as being punished for a good week, which is not quite fair, but the mechanism is real and it changes how you should manage an account after a strong run.
Many firms cap the trail. The floor follows the peak until it reaches the initial deposit level, then stops, so once the account is comfortably in profit the limit becomes a fixed absolute figure. That single rule changes the risk profile of an evaluation completely, and it is worth finding in the terms rather than assuming either way. Whether the trail is computed on closed balance or on live equity is a second variable on top.
Read the rule, then reproduce it in a spreadsheet with your own numbers and check the breach point against the firm's dashboard after a live trade. Trading is high risk and a rule you have modelled yourself is the only one you can actually plan around.
Daily limits and the clock they run on
Daily loss rules reset at a boundary defined in the firm's server time zone. If that boundary is at 00:00 in a zone several hours from yours, then your afternoon and the reset can fall in awkward places, and a position held across the boundary starts the new day measured against a fresh reference. A trade that was showing a modest loss at the reset now carries that loss into a new daily allowance, or begins the day already partway through it, depending on how the reference is set.
Firms implementing this on their own platform have to decide these questions explicitly, which is why the rule engine in a prop firm CRM exposes the reference point, the clock and the balance-or-equity choice as separate settings rather than as one number. Traders should assume nothing and ask which combination is in force.
Depth is only half the picture
Reading a track record, most people look at the maximum drawdown percentage and stop. Duration is the other half and often the more informative one. An account that fell 12% and recovered in three weeks is a different proposition from one that fell 12% and took fourteen months to make a new high, even though the headline figure is identical. The second is far harder to sit through, and it is the one that ends careers, because the trader abandons the method somewhere in month nine.
The payoff profile of a strategy largely determines the shape. A high hit rate approach with a modest payoff produces shallow, frequent dips. A low hit rate approach at a high reward multiple produces long flat stretches punctuated by sharp gains, and the flat stretches are drawdown. Neither is better, and choosing between them is really a choice about what you can tolerate.
The past maximum is a floor, not a ceiling
The most dangerous use of the figure is as a limit. A strategy whose worst historical fall was 15% has not promised anything about the future, and the sample that produced that number was finite. Long runs of losses are ordinary in any process with randomness in it, and a longer sample tends to contain worse ones. Plan for a drawdown deeper than anything in your record, because the alternative is discovering the new maximum with position sizes chosen for the old one.
That is where measurement meets sizing. The fraction risked per trade sets how much a losing streak costs, which is the connection our guide to risk management rules works through with the recovery arithmetic. Halving the risk per trade does not halve the number of losses in a row, but it does halve what they take, and it buys the time in which a strategy either proves itself or gets retired for the right reasons.
"Ask a trader what their maximum drawdown was and they answer instantly. Ask how long it lasted and they have to think. The second number is the one that tells you whether they will still be trading next year."
— Alex Onta, Executive Director, SINGUARD
Key Takeaways
- Absolute drawdown measures from the starting deposit and never moves; relative or trailing drawdown follows the account's high water mark upward.
- Whether the rule is written against balance or equity decides if an unrealised loss can breach it before you close anything.
- Daily limits reset on the firm's server clock, so positions held across that boundary are measured against a new reference.
- Duration matters as much as depth, and a historical maximum is a sample rather than a promise about the future.
Frequently Asked Questions
What is the difference between absolute and relative drawdown?
Absolute drawdown is measured from the starting balance and does not move, so a fixed floor sits under the account for its whole life. Relative or trailing drawdown is measured from the highest point the account has reached, so the floor rises as you make money and a profitable account can breach after giving back gains it never withdrew.
Do floating losses count towards a drawdown limit?
It depends on whether the rule is written against balance or equity. An equity based rule includes open profit and loss, so an unrealised loss can breach the limit before you close anything. A balance based rule only counts closed trades. Firms state which one they use, and the difference decides whether a position that later recovers can still end your account.
How is a daily loss limit usually measured?
From a reference point set at the start of the trading day, commonly the previous day's closing balance or closing equity, with the day boundary defined in the firm's server time zone rather than yours. Both details matter, because a position held across the boundary can start the new day already showing a loss against the new reference.