Drawdown is a risk-limit mechanism designed to define how much an account may lose before the evaluation or funded period ends. It is the single most consequential set of rules in any trader evaluation — and the most misunderstood. This guide covers every drawdown model in use, how each is calculated, and the specific details that decide whether you breach.
What is drawdown in a trader evaluation?
Drawdown is the decline in account value from a reference point — either the starting balance or the account’s peak. Evaluation programs enforce two independent drawdown limits: a daily loss limit that resets each day, and a maximum overall drawdown that applies for the life of the account.
Both limits operate at the same time. Most traders plan carefully for the overall limit and then breach the daily loss limit, because the daily limit interacts with intraday volatility in ways that are easy to underestimate.
How is daily drawdown calculated?
Daily drawdown is calculated from a start-of-day reference — balance or equity at the daily reset time — minus a fixed percentage. If account value touches that level at any moment during the day, the limit is breached, even if open trades would later recover.
Three program-specific details decide everything, and they vary between firms:
- Measurement basis. Equity-based limits count floating losses tick by tick; balance-based limits only register closed trades. Equity-based is the stricter and more common model — see equity vs balance.
- Reference point. Start-of-day balance and start-of-day equity produce different limits whenever positions are held overnight.
- Reset time. Commonly 00:00 server time or UTC. A position held through the reset begins the new day already consuming the fresh limit.
Worked example: a $100,000 account with a 5% equity-based daily limit and a start-of-day equity of $101,200 breaches if equity touches $96,140 at any point that day. A floating loss of $5,060 — even one that later recovers to a profitable close — ends the evaluation.
What is the difference between trailing and static drawdown?
A static drawdown fixes the maximum loss level at a set distance below the starting balance, and it never moves. A trailing drawdown moves the loss limit up as the account makes new highs, locking in each peak — profits do not create the buffer they appear to.
The practical consequence: under a static model, an account that grows from $100,000 to $108,000 has $18,000 of room above a 10% limit. Under a 6% trailing model, the same account has only $6,480 of room — the limit trailed up to $101,520 when equity peaked. Two further questions determine the real difficulty of any trailing model: does it trail on closed balance or floating equity, and does it stop trailing once it reaches the starting balance? Confirm both in the rules document before you size a single trade.
Why do most drawdown breaches happen?
Most breaches are daily-limit breaches during high-volatility sessions, driven by three patterns: oversized positions relative to the daily limit, multiple correlated positions that move as one, and holding losers into news events. Slow erosion toward the overall drawdown limit is comparatively rare.
The defence is mechanical, not psychological: cap total risk across all open positions at a fraction of the daily limit — a common professional standard is one-third — so that even a worst-case day on every position cannot produce a breach. Risk per trade then derives from that cap, not from conviction.
Drawdown checklist before starting any evaluation
- Is the daily limit measured on equity or balance?
- What is the daily reference point — start-of-day balance or equity?
- What time does the daily limit reset, and in which timezone?
- Is the overall drawdown static or trailing?
- If trailing: does it trail equity or balance, and does it lock at breakeven?
- Do weekend and overnight positions count against the limits?
- What is your maximum simultaneous open risk as a percentage of the daily limit?
If you can answer all seven from a program’s published rules, the program is transparent enough to trade. If you cannot, that is itself the answer.
FundedProp provides simulated trading evaluations. All accounts are demo accounts; no real capital is traded by participants. This is not investment advice.