One of the most important risk rules in prop firm trading is the Maximum Drawdown.
Many traders fail prop firm challenges not because their strategy is bad, but because they do not fully understand how drawdown works.
In this guide, we will explain:
- What maximum drawdown means
- Different types of drawdown used by prop firms
- Static drawdown
- Trailing drawdown
- Intraday trailing drawdown
- End-of-day (EOD) trailing drawdown
- Dynamic EOD drawdown
To make everything easier to understand, we will use the same $100,000 account example for every scenario.
What Is Maximum Drawdown in Prop Firms?
Maximum drawdown is the maximum amount your account is allowed to lose before it is considered a rule violation.
If your account equity drops below the allowed drawdown level, the prop firm considers it a hard breach and your account is usually terminated.
Example:
Account Size: $100,000
Maximum Drawdown: 10%
Maximum allowed loss:
$100,000 × 10% = $10,000
If the account falls below:
$90,000
the account violates the drawdown rule.
However, the way this drawdown is calculated depends on the type of drawdown model used by the prop firm.
1. Static Drawdown
Static drawdown is the simplest type of drawdown. The drawdown level never moves.
It is fixed based on your starting account balance.
Example
Account Size: $100,000
Maximum Drawdown: 10%
Drawdown limit:
$90,000
Even if your account grows, the drawdown limit remains the same.
Scenario
- You grow the account to $110,000
- The drawdown limit is still $90,000
This means you now have a $20,000 buffer.
Static drawdown is considered trader-friendly because the risk limit does not tighten as your account grows.
2. Trailing Drawdown
Trailing drawdown is more complex. Instead of staying fixed, the drawdown level moves up as your account balance increases.
This means that as you make profits, the minimum allowed balance also rises.
Example
Account Size: $100,000
Trailing Drawdown: $10,000
Initial drawdown limit:
$90,000
Scenario
- Account grows to $105,000
New trailing drawdown level:
$105,000 - $10,000 = $95,000
The drawdown limit has now moved up to $95,000.
If your account drops below $95,000, you violate the rule.
Trailing drawdown becomes stricter because your risk cushion gets smaller as you make profits.
Types of Trailing Drawdown
Trailing drawdown itself can work in different ways depending on the prop firm.
The most common types are:
- Intraday Trailing Drawdown
- End-of-Day (EOD) Trailing Drawdown
- Dynamic End-of-Day Drawdown
3. Intraday Trailing Drawdown
Intraday trailing drawdown moves in real time based on your highest equity reached during the trading day.
This means even temporary profits during a trade can raise the drawdown level.
This model is commonly used in some futures prop firms such as Apex Trader Funding evaluation plans.
Example
Account Size: $100,000
Trailing Drawdown: $10,000
Initial drawdown level:
$90,000
Scenario
- Your trade temporarily pushes equity to $103,000
New drawdown level:
$103,000 - $10,000 = $93,000
Even if the trade later closes lower, the drawdown limit has already moved up.
This makes intraday trailing drawdown one of the strictest risk models.
4. End-of-Day (EOD) Trailing Drawdown
End-of-day trailing drawdown only adjusts based on the account balance at the end of the trading day.
Intraday fluctuations do not affect the drawdown level.
This model is used by several futures prop firms, including firms like Lucid Trading.
Example
Account Size: $100,000
Trailing Drawdown: $10,000
Initial drawdown:
$90,000
Scenario
- During the day your equity reaches $105,000
- But you close the day at $102,000
New drawdown level is calculated using the end-of-day balance:
$102,000 - $10,000 = $92,000
This system is more trader-friendly because temporary intraday spikes do not tighten your drawdown.
5. Dynamic End-of-Day Drawdown
Dynamic EOD drawdown is similar to EOD trailing drawdown, but the drawdown continues to adjust dynamically based on the account balance at the end of each trading day.
This model is used by some modern futures prop firms such as E8 Futures.
Example
Account Size: $100,000
Dynamic Drawdown: $10,000
Day 1
- End-of-day balance: $104,000
New drawdown level:
$104,000 - $10,000 = $94,000
Day 2
- Account grows to $108,000
New drawdown level:
$108,000 - $10,000 = $98,000
The drawdown keeps adjusting upward as the account grows.
Summary of Drawdown Types
| Drawdown Type | How It Works | Strictness |
|---|---|---|
| Static Drawdown | Fixed level based on starting balance | Most trader-friendly |
| Trailing Drawdown | Moves up with account profits | Moderate |
| Intraday Trailing | Adjusts in real time using highest equity | Very strict |
| EOD Trailing | Adjusts using end-of-day balance | Moderate |
| Dynamic EOD | Updates daily based on closing balance | Moderate |
Final Thoughts
Understanding drawdown rules is critical for success in prop firm trading.
Many traders fail challenges simply because they misunderstand how drawdown moves during trading.
Before starting any prop firm evaluation, make sure you clearly understand:
- Whether the firm uses static or trailing drawdown
- If trailing drawdown is intraday or end-of-day
- How profits affect your minimum allowed balance
Mastering these risk rules will help you protect your account and significantly increase your chances of passing a prop firm challenge.