Trailing drawdown — A maximum drawdown whose floor moves up as the account makes new highs, so gains permanently raise the level at which the account breaches.
How trailing drawdown works in prop trading
A trailing drawdown follows your account upward. Start a $50,000 account with a $2,000 trailing drawdown and the floor is $48,000. Reach $52,000 and the floor moves to $50,000. It never moves back down, so every new high permanently tightens the amount you may lose from that point.
Two details decide how punishing it is. First, whether it trails on balance (closed trades only) or on equity, including unrealised profit — an equity trail means a trade that runs to +$1,500 and comes back to breakeven has cost you $1,500 of permanent drawdown room without ever being a winner. Second, where it stops: many firms freeze the trail once the floor reaches the starting balance plus a small buffer, which is the point where the account stops being able to lose money you started with.
Key points
- The floor only ever moves up. Giving back an unrealised gain on an equity-trailed account permanently reduces your room.
- Equity-based trailing punishes letting winners run and then giving them back — the most common way traders breach.
- Most futures firms stop the trail once it reaches the initial balance plus a buffer; that point is where the account becomes materially safer.
- A trailing drawdown makes scaling into a position more dangerous than the same size taken at once, because the peak equity is what counts.
Example
$50,000 account, $2,000 trailing drawdown on equity. A trade runs to +$1,800 unrealised, then closes flat. The high-water mark was $51,800, so the floor is now $49,800 — you can only lose $200 of your original balance despite having made nothing.
Also known as
- trailing DD
- moving drawdown
- trailing max drawdown
Frequently asked questions
Does trailing drawdown use balance or equity?
Both exist. Balance-based trails only update when you close a trade; equity-based trails update on unrealised profit too, including intraday spikes you never banked. Equity-based is stricter and more common in futures evaluations. The program terms state which one applies — this is the first thing to check on any account.
When does the trailing drawdown stop trailing?
Most firms freeze it once the floor reaches your starting balance, or that balance plus a small buffer. From that point the drawdown behaves like a static one and your original capital is protected. Some programs trail indefinitely, which is a meaningfully harder product.
How do I avoid breaching a trailing drawdown?
Take profit rather than letting a large unrealised gain retrace, size so a normal losing streak stays well inside the current floor, and track the floor after every session rather than the account balance. On an equity-trailed account, treat your peak unrealised P&L as if it were realised.
Put this into practice
Trailing 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.