Drawdown

What is Drawdown?

Drawdown measures how much your account has declined from its peak value before recovering. If your account grows from $100,000 to $108,000 and then drops to $104,000, your drawdown is $4,000 or 3.7% (from the $108,000 peak). It's the most important risk metric for prop firm traders because most challenges have strict drawdown limits.

Types of Drawdown

• Absolute drawdown: The decline from your initial balance — relevant for overall drawdown limits
• Relative (trailing) drawdown: The decline from your highest equity point — used by many prop firms as a trailing maximum
• Daily drawdown: The maximum loss allowed in a single trading day — typically 4-5% of account balance

Managing Drawdown

The key to surviving prop firm drawdown rules is position sizing. If your maximum daily drawdown is 5% ($5,000 on a $100K account) and you risk 1% per trade, you can absorb 5 consecutive losing trades before hitting the limit. If you risk 2%, only 2.5 losses will breach it. Conservative position sizing isn't timid — it's mathematical survival.