Static vs. Trailing Drawdowns

Proprietary trading firms (Prop Firms) provide capital to traders who pass an evaluation. However, these evaluations are explicitly designed with complex drawdown rules that catch amateurs off guard.

Understanding the difference between a Static and Trailing drawdown is the difference between getting funded and losing your challenge fee.

1. The Static Drawdown (Absolute Drawdown) A static drawdown is calculated based on your **initial starting balance** and never changes, regardless of how much profit you make.

• **Example**: You buy a $100,000 challenge with a 10% maximum static drawdown ($10,000).
• **The Rule**: Your account equity cannot drop below $90,000 at any point.
• **The Advantage**: If you make $5,000 in profit (balance is now $105,000), your maximum loss limit remains at $90,000. You now have $15,000 of breathing room before you breach the account.
• *Firms like FTMO and FundedNext use static max drawdowns.*

2. The Trailing Drawdown (High-Water Mark) A trailing drawdown moves up as your account balance (or equity) increases. It is designed to punish traders who let winning trades turn into losing trades.

• **Example**: You buy a $100,000 challenge with a 5% trailing drawdown ($5,000). Your initial breach level is $95,000.
• **The Trap**: If your open trades float in profit by $2,000 (Equity = $102,000), your drawdown level *trails* up by $2,000. Your new breach level is now $97,000.
• If you close the trade at breakeven ($100,000), you are only $3,000 away from failing the challenge, even though you didn't lose any money!
• **End-of-Day (EOD) vs Intra-trade**: Always read the fine print. EOD trailing drawdowns only calculate at 5:00 PM EST, while Intra-trade trailing drawdowns calculate tick-by-tick.