Glossary
Drawdown
Drawdown is how far an account has fallen from a high point, measured in money or as a percentage.
What it means
In a prop firm challenge, drawdown rules set how much an account may lose before it fails. Most firms use two limits: a maximum drawdown for the life of the account, and a daily loss limit for each trading day.
Firms measure maximum drawdown in one of three ways. Static drawdown is fixed to the starting balance and never moves. Trailing drawdown follows the account's highest point, so the limit rises as the account grows. End of day trailing drawdown moves the limit only at the close of each trading day.
Firms also differ on whether they measure against balance, which counts only closed trades, or against equity, which includes open trades. Traders should read the exact rule of their firm, and firms should publish it with a worked example.
Worked example
On a $100,000 account with a 10% static maximum drawdown, the account fails if its equity falls below $90,000, no matter how high the account climbed before.
Free tools that use this
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