Understanding Trailing Drawdown Rules at Various Prop Firms
Hello, bold traders taking on the challenge in the world of proprietary trading!
If you have stepped into the prop firm world, you surely know there is one rule that often becomes the dividing line between getting a large capital account and returning to square one: Drawdown.
Not just daily or total Maximum Loss, but there is one type of limit that moves, following your equity movement, namely Trailing Drawdown. This rule is designed to protect the prop firm's capital, but for traders, it is the most frequently violated limit due to its dynamic nature and frequent misunderstandings.
As a meticulous researcher, I want to help you navigate this complexity. This article will thoroughly break down what prop firm trailing drawdown is, why this rule differs between Forex/CFD and Futures prop firms, and how the right risk management strategies can help you pass the evaluation and keep your account.
Let's start with the foundation.
Why Is Drawdown the Main Focus?
Before discussing trailing, we need to align our understanding of why prop firms are so focused on drawdown in general.
Drawdown is a measure of how much loss you experience from the highest point (peak) of your balance or equity. For prop firms, the goal is not just finding traders who can profit, but finding traders who can profit consistently and controllably.
Violating drawdown rules—whether daily or total—means you lost control over risk, and that is a danger signal for prop firms entrusting their capital to you.
Knowing the Three Main Loss Limits
Generally, there are three main types of loss limits you must understand when dealing with prop firms:
- Daily Drawdown (Daily DD): The maximum loss allowed in a single trading day, calculated from that day's starting balance (or previous day's equity high, depending on the firm).
- Maximum Absolute Drawdown (Absolute DD): The total loss limit allowed, calculated from the account's initial balance. For example, a $100,000 account with 10% Absolute DD means your account cannot drop below $90,000.
- Maximum Trailing Drawdown (TD): This is what we will discuss in depth. A loss limit that moves following your equity.
If you want to understand more about the basic concepts of Relative and Absolute Drawdown, you can read our other guide.
Dissecting Prop Firm Trailing Drawdown
Trailing Drawdown (TD) is a risk mechanism designed to ensure that the prop firm never loses more than a set amount, even if you have generated large profits.
Simply put, TD is a system Stop Loss that follows you up.
Definition of Trailing Mechanism
Trailing Drawdown is calculated as the maximum allowed distance between your High Water Mark (HWM) or equity peak and the allowed loss limit.
High Water Mark (HWM): This is the highest equity point your account has ever reached, whether closed positions (balance) or open positions (equity).
For example, if your TD limit is 5% on a $100,000 account, your loss limit is $95,000 (100,000 - 5,000).
When you start generating profit:
- If your equity reaches $101,000, your new HWM is $101,000.
- Your new loss limit will move up to $96,000 (101,000 - 5,000).
This limit will continue to "trail" behind your HWM, moving up every time a new HWM is reached, but will never move down if your equity decreases. A violation occurs when your equity touches the prevailing TD limit.
This sounds simple, but its implementation varies greatly between prop firm models.
Crucial Differences in Prop Firm Trailing Drawdown Implementation: Forex/CFD vs. Futures
This section is very important, because a misunderstanding of when this trailing stops can cause you to violate rules unknowingly.
Prop firms can be divided into two broad categories based on how they manage prop firm trailing drawdown:
Model A: Trailing Drawdown That Stops (Forex/CFD Focused)
Many prop firms focused on Forex, CFD, and Commodity trading (e.g., FTMO, The Funded Trader, FundedNext) use a TD model that has a stop limit (Stop Trailing).
How It Works:
In this model, Trailing Drawdown will stop moving up once your account reaches a certain profit level, which is usually equal to the initial balance plus the maximum allowed drawdown limit.
Example $100,000 Account, Max TD 5% ($5,000):
- Initial Limit: $95,000.
- Trailing Stop Point: $105,000.
- You trade and equity reaches $103,000. TD limit moves to $98,000 (103,000 - 5,000).
- You continue trading and equity reaches $105,000 (or sometimes $106,000, depending on firm policy).
- At the $105,000 point, Trailing Drawdown will stop moving. Your loss limit is permanently set at $100,000 (initial balance).
Why is this important?
Once you reach the stop point, your Trailing Drawdown effectively changes into Maximum Absolute Drawdown (permanent loss limit at initial balance). This gives much greater freedom for funded traders because you only need to focus on keeping the account above the initial balance, not constantly being chased by moving trailing.
Model B: Lifetime Trailing Drawdown (Futures Focused)
Prop firms focusing on Futures instruments (like Apex Trader Funding, Topstep, Bulenox) often use stricter Trailing Drawdown that does not stop, or stops much higher.
How It Works:
TD will continue to follow your High Water Mark (HWM) all the time, including the funded phase, up to a very high limit or even not stopping at all. This limit is often called the Trailing Threshold.
Example $50,000 Futures Account, Trailing Threshold $2,000:
- Initial Limit: $48,000.
- You profit $1,000. Equity reaches $51,000 (HWM). TD limit moves to $49,000 (51,000 - 2,000).
- You lose $500. Equity drops to $50,500. TD limit remains at $49,000.
- You profit again $1,500. Equity reaches $52,000 (New HWM). TD limit moves to $50,000 (52,000 - 2,000).
Why is this harder?
In the Futures model, you must maintain the distance between your current equity and the previous High Water Mark. If you make a big profit and then experience a losing streak, your TD limit can become very close to your current position.
Imagine: Your account reaches $55,000, and your TD limit moves to $53,000. If you then drawdown back to $53,000, your account is blown, even though you are still $3,000 above the initial balance ($50,000)!
This is why understanding the difference in prop firm trailing drawdown rules is crucial before you choose an evaluation program.
Proven Strategies to Manage Prop Firm Trailing Drawdown Professionally
After understanding the mechanism, it is now time to devise a strategy so you don't become a victim of this rule. The main key is disciplined risk management, just like a professional investment manager.
1. Master Careful Position Sizing Strategy
Trailing drawdown violations often occur due to over-leveraging during profit euphoria.
When you have just generated sufficient profit, your High Water Mark rises. The distance between current equity and TD limit narrows. If you take large positions (large lot sizes) after big profits, one large loss (especially due to slippage or news volatility) can instantly violate the TD limit.
Practical Solution:
- Always use small risk per trade (ideally 0.5% to a maximum of 1% of initial balance).
- Ensure your Position Sizing remains proportional. Do not increase lot size just because you have a large profit cushion.
2. Focus on Realizing Profit (Locking In)
In a prop firm trailing drawdown scenario, profit still in open positions (floating profit) can raise the High Water Mark (HWM) and advance the TD limit, but if that position then reverses, you don't get the profit and your TD limit remains at the highest level ever reached.
Case Example:
- $100k Account, 5% TD ($95k).
- You open a position, floating profit reaches $3k. HWM becomes $103k. TD limit moves to $98k.
- Position reverses and Closes at Break Even ($0 profit). Equity returns to $100k.
- Problem: Your equity is $100k, but your TD limit is now $98k. You only have $2k room for loss before the account is blown.
Practical Solution:
- Be more aggressive in securing profit. Instead of letting large floating profit run, consider closing part of the position (partial close) or moving Stop Loss to Break Even as soon as possible.
- Focus on High Water Mark generated by balance, not just equity (equity), especially in very strict Futures models.
3. Be More Conservative After Significant Profit
Once you have reached significant profit (e.g., 4-5%), your wiggle room against the moving TD limit will narrow.
If you have reached a high HWM, it is very wise to take a short break or drastically reduce your lot size. Let the trailing limit "chase" you, or wait until the TD limit stops (if you use model A).
Remember, in the prop trading world, your goal is to keep the account, not maximize daily profit.
4. Always Monitor Trailing Limit in Real-Time
Some prop firms provide dashboards or calculators displaying your current trailing drawdown limit. Habituate yourself to checking this number before every entry.
If you use a prop firm implementing Model B (Futures), you must treat this trailing limit as your new Maximum Loss and it must not be violated, regardless of your initial balance.
Case Study: Securing Account Until Stop Point
Let's imagine you pass the challenge at one of the major prop firms like FTMO or The Funded Trader (Model A) and get a $200,000 account with 5% TD ($10,000).
Your Goal: Reach the trailing stop point at $210,000.
Strategy:
- Start (Equity $200k): TD limit at $190k. You have $10k margin.
- Reach $205k: TD limit moves to $195k. Your margin is $5k.
- Caution: At this stage, your margin shrinks. Keep risk per trade as low as possible (e.g., 0.25%).
- Reach $210k (Stop Trailing Target): TD limit stops moving and locks at $200,000 (Initial Balance).
After reaching this point, you have successfully "secured" your account. The prop firm knows you have proven the ability to generate profit exceeding the initial risk amount they bore. All profit above $200,000 is now a safe profit "cushion".
Conclusion: Discipline Is Your Best Partner
Understanding prop firm trailing drawdown rules is an important step in your journey toward long-term success. This rule is not an obstacle, but a tool to limit impulsive and undisciplined traders.
If you plan to enter the Futures prop firm world, make sure you truly understand how Trailing Drawdown works (strict Model B). If you focus on Forex/CFD, take advantage of the stop point (Model A) as your first risk management target.
Remember, as a meticulous trader, your job is to read every line of the rules and adjust your careful Position Sizing Strategy to fit this moving limit.
With clear understanding, controlled risk, and unwavering discipline, you will be able to manage trailing drawdown and maximize your opportunity to become a sustainable funded trader. We always support your journey in achieving financial freedom through measurable trading. Happy trading!
By: FXBonus Team
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