Drawdown

Drawdown is the decline in account equity from its highest point to a subsequent low. In prop trading it is the single most important risk metric because every funded account is bounded by a maximum drawdown limit — breach it and the account is terminated.

Most prop firms enforce two distinct drawdown rules in parallel. The first is the daily loss limit, measured from the start of each trading day. The second is the maximum drawdown, measured against the account's peak equity for the life of the account. Both must be respected simultaneously.

The hard part is that "drawdown" hides several different calculations. Static drawdown is a fixed dollar amount from the starting balance. Trailing drawdown moves upward as the account hits new highs. Some firms calculate drawdown against end-of-day equity; others enforce it intraday in real time. Two firms can both advertise a "5% drawdown" and apply it in ways that produce dramatically different outcomes for the same trading sequence.

Before depositing a fee, confirm: (1) is the drawdown static or trailing, (2) is it calculated EOD or in real time, (3) does it include unrealized PnL, and (4) at what equity level does it lock in place.