Maximum Drawdown
In prop trading, maximum drawdown is a firm-set rule that caps how far an evaluation or funded account may fall: the account's equity may not drop below a floor, measured from the starting balance (a static limit) or from a running high (a trailing limit). Whether touching the floor already counts as a breach is firm-defined, and a breach fails the evaluation or closes the funded account, on terms the firm sets.
The breach is measured against either the account's initial starting balance (static drawdown) or its highest recorded balance or equity (trailing drawdown; the firm defines which, and whether that high updates intraday or once a day). On an end-of-day (EOD) trailing limit, the floor's level moves only at the daily close, but equity is still checked against it in real time during the session. Where the firm measures live equity, a single intraday excursion below the floor is enough to end the account, even if equity recovers before the position closes.
This page covers the mechanic; it is not trading advice.
Prop firm rules vary between firms and change frequently. Always verify specific rules directly with your firm before making any decision.
How maximum drawdown ends an account
The total loss limit for your entire challenge. If your account falls below its floor at any point, the challenge ends. The size varies by firm and account type and is commonly stated as a percentage of the starting balance; with an illustrative 10% limit, a $10,000 account on a static limit has its floor at $9,000.
The mechanic that surprises traders is the per-tick measurement. At a firm that measures live equity, a trade that briefly draws down past the floor and then recovers within the same minute is still a breach, because the risk engine records the lowest equity reading, not the closing equity.
Counting loss-making trades to the floor
Account: $10,000. Maximum drawdown: 10% = $1,000 (an illustrative limit). Floor sits at $9,000. Risk per trade: 1% = $100.
Consecutive maximum-loss trades that take the account from its starting balance to the floor: $1,000 ÷ $100 = 10 trades. The 10th loss leaves equity at exactly $9,000. At firms that treat touching the floor as a breach, that loss ends the challenge; at firms that require equity to fall below the floor, any further loss does. With 2% risk per trade ($200 per loss-making trade), the floor is reached in 5 trades.
If the account is at $10,500 (up $500), the static floor remains at $9,000, so the buffer is now $1,500 — the floor does not move with profits unless the firm uses a trailing variant. Under static drawdown the buffer grows as profits accumulate. Under trailing drawdown the floor sits $1,000 below the account's high, as the firm defines it (balance or equity, updated intraday or at the end of the day), and rises each time that high is updated, so profit does not widen the buffer beyond $1,000 once the floor catches up, and every pullback from the high shrinks it. Some trailing floors stop rising at a firm-set lock level, often the starting balance; others never lock.
Related terms
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Common questions
Does maximum drawdown include unrealised loss on open positions?
Yes at the firms whose published rules state a basis: the floor is compared with equity, which includes floating P&L on open positions. A position drawing down to a price level that would breach the floor ends the account even if the trader did not intend to hold to that level, and even if the position would have recovered. Some firms set the level of a trailing floor from the closed-trade balance high, but the breach is still checked on equity. The firm's rules specify the method.
Can the maximum drawdown be reset after a near-breach?
A near-breach does not widen the buffer. On a static limit the floor stays where it was set; on a trailing limit it can only move up as the account makes new highs, never back down. Whether and when a limit resets, for example after a payout or a paid reset, is set by each firm, so its rules give the answer.