Drawdown is one of the most important concepts to understand when evaluating a prop trading program.

At its simplest, drawdown describes the amount an account can lose before reaching a defined risk threshold. However, the way that threshold is calculated can vary significantly between programs.

Understanding the calculation method is therefore just as important as knowing the advertised percentage.

What Is Drawdown?

Suppose a hypothetical trading account starts with:

$100,000

If the maximum drawdown is 10%, the account has a $10,000 maximum-loss allowance under a simple static calculation.

The critical question is:

How does the firm calculate that $10,000?

This is where different drawdown models become important.

Static Drawdown

Static drawdown establishes a fixed loss floor based on the starting account balance.

For example:

Starting balance: $100,000
Maximum drawdown: 10%
Drawdown floor: $90,000

If the account later increases to $105,000, the original $90,000 floor remains unchanged under a static model.

This means the distance between the current account value and the drawdown floor can increase as profits accumulate.

Trailing Drawdown

A trailing drawdown moves according to the account’s performance.

For example, if the drawdown threshold follows the account’s highest equity level, reaching a new high can cause the loss floor to move upward.

This can make the calculation considerably different from a static drawdown.

The exact mechanics depend on the firm’s rules.

End-of-Day Trailing Drawdown

Some programs calculate trailing drawdown using end-of-day values.

Under this type of structure, the drawdown threshold may update based on the account’s qualifying end-of-day performance rather than every intraday movement.

This is different from an intraday or tick-by-tick trailing model.

Intraday or Equity-Based Trailing Drawdown

Some trailing systems can respond to new equity highs during the trading session.

That means unrealized gains may affect the drawdown calculation depending on the firm’s rules.

Consider a simplified example:

A trader begins with:

$100,000

The account reaches:

$102,000

If the drawdown mechanism trails the highest equity level, the loss threshold may move upward according to the program’s specific calculation.

The trader therefore needs to understand whether the firm’s calculation uses:

• Balance
• Equity
• End-of-day equity
• Intraday equity
• Realized profit
• Unrealized profit

Daily Loss vs. Maximum Drawdown

These two rules should not be confused.

Daily loss limit
Controls how much an account can lose during a particular trading day.

Maximum drawdown
Controls the overall loss threshold for the account.

A program can have both rules at the same time. Breaching either applicable limit can result in the evaluation or account being closed.

Why Drawdown Rules Matter

Consider two hypothetical programs:

Program A

• $100,000 account
• 10% static drawdown

Program B

• $100,000 account
• 10% trailing drawdown

Although both advertise a 10% maximum drawdown, the practical mechanics can be very different.

That’s why simply comparing the percentage isn’t enough.

You need to understand how the percentage is calculated and when the threshold moves.