Daily Drawdown vs Max Drawdown Demystified
The #1 reason 90% of traders fail prop evaluations. Learn the crucial differences between balance-based and equity-based daily drawdown, and how midnight rollover resets your limits.
- Daily Drawdown (usually 4% or 5%) is calculated based on the starting equity/balance at the daily server reset.
- Equity-based daily drawdown counts open floating losses, NOT just closed trades!
- Max Drawdown is the cumulative account floor (typically 8% to 10% from the initial balance).
- Holding open winning trades past midnight can dramatically reduce your next day daily loss allowance.
The Silent Account Killer: Daily Drawdown
If you ask any prop firm support team what causes 9 out of 10 account breaches, the answer is always Daily Drawdown (DDD). Traders frequently wake up to find their accounts terminated even when their closed P&L was positive! How is that possible?
Let's break down the exact mathematics.
Equity-Based vs Balance-Based Daily Drawdown
There are two major formulas used across prop firms:
1. Balance-Based Daily Drawdown (Trader-Friendly) Your limit for the day is strictly based on your closed balance at daily reset (typically 00:00 server time or 5:00 PM EST). - Starting Balance today: $100,000 - 5% Daily Limit: $5,000 - Daily Breach Level: $95,000 - Even if your equity fluctuated during the day, your closed balance is what sets the mark.
2. Equity-Based Daily Drawdown (Strict / High Water Mark) Your limit for the day is based on the higher of your starting balance or starting equity at 00:00 server time: - Starting Balance: $100,000 - You have an open trade floating at +$3,000 profit at midnight. - Starting Equity at 00:00 = $103,000! - 5% Daily Limit = 5% of $103,000 = $5,150. - New Breach Level for today: $103,000 - $5,150 = $97,850!
Look at what happens if that trade turns around: If your +$3,000 floating trade drops back to -$2,200: Account Equity = $97,800 Result: BREACH! (Even though your closed balance never went below $100k!)
Static Drawdown vs Trailing Drawdown
| Drawdown Type | How it Moves | Difficulty | Example |
|---|---|---|---|
| Static (Absolute) | Fixed floor based on initial balance | 🟢 Easiest | Initial balance $100k, 10% max DD. Floor is permanently $90,000, regardless of profits. |
| Trailing on Closed Balance | Floor trails upwards as you lock in profits | 🟡 Moderate | Start $100k, floor $92k. You make $5k profit ($105k balance). Floor trails to $97k. |
| Trailing on Open High-Water Equity | Floor trails tick-by-tick with floating peaks | 🔴 Hardest | If trade floats to $108k, floor jumps to $100k. If trade retraces to $99k before closing, you breach! |
Always prefer firms that offer Static Drawdown or Trailing on Balance Only (like Funding Pips, FTMO, and Alpha Capital).
Lesson Knowledge Check
In an equity-based daily drawdown model with a 5% limit, what happens if your balance is $100,000 but you have +$4,000 in floating profits at daily rollover?
What is the main difference between static drawdown and trailing drawdown?
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