Max drawdown — The total loss an account may take before it is closed, measured from a reference point the firm defines as static, end-of-day, or trailing.
How max drawdown works in prop trading
Maximum drawdown is the hard floor on an account. Touch it and the account is breached, regardless of how much profit came before. It is quoted as a dollar amount or a percentage of the account size — commonly 3% to 6% on futures programs — but the number is far less important than the mechanic behind it.
There are three mechanics and they behave very differently. A static drawdown sets the floor once and leaves it. An end-of-day drawdown moves the floor up based on your closing balance each session. A trailing drawdown moves it up as your equity or balance makes new highs, sometimes tick by tick. The same $2,500 allowance can be a comfortable budget or a trap depending on which of the three you have.
Key points
- Max drawdown is measured against a moving or fixed reference point — identify which before you size a trade.
- Trailing variants can be breached on an open position that later recovers, if the firm measures on equity rather than balance.
- Hitting max drawdown normally closes the account permanently; on an evaluation you can usually buy a reset.
- Typical futures allowances run 3% to 6% of nominal account size, well below what the tier label implies.
Example
On a $50,000 account with a $2,500 max drawdown, a static rule puts the floor at $47,500 forever. A trailing rule starting at the same floor moves it to $48,500 the moment your balance reaches $51,000.
Also known as
- maximum drawdown rule
- max loss limit
- overall drawdown
Frequently asked questions
What happens if I hit max drawdown?
The account is breached and normally closed. Positions are flattened, and on a funded account the balance and any unpaid profit are usually forfeited. On an evaluation you can generally buy a reset or a new account; on a funded account most firms require you to start a fresh evaluation.
Is max drawdown based on balance or equity?
It varies, and it is the single most important detail in the rule. Balance-based drawdown only updates on closed trades. Equity-based drawdown counts unrealised losses, which means an open position that goes against you can breach the account before you close it.
Put this into practice
Max drawdown is described here as a plain-language educational definition. Firms, platforms, and account programs may apply different conditions or calculations. Verify the current official terms before using this definition to make an account decision.