Equity-Based Drawdown
Drawdown & Loss LimitsA drawdown calculation method that includes unrealized (open) trade profits and losses in the account value. Your equity fluctuates with every tick while positions are open, making this stricter than balance-based drawdown.
Equity-based drawdown means the firm monitors your real-time account value including open positions. If you have a $5,000 floating loss and a $4,500 drawdown limit, you would breach the limit even though you have not closed the losing trade.
This method is used by FTMO for daily loss limits. It prevents traders from holding deep underwater positions hoping for a reversal. With equity-based rules, you cannot "hide" losses by keeping positions open.
The practical impact is that you need wider stop-losses or smaller position sizes compared to balance-based drawdown. A trade that temporarily goes against you by $3,000 before recovering to profit would be fine under balance-based rules but could breach an equity-based daily loss limit.
FTMO $100K with equity-based 5% daily loss limit ($5,000): you open 2 lots of EUR/USD. The trade moves against you by 200 pips. Floating loss: $4,000. You also have a closed loss of $1,200 from earlier. Total equity-based loss: $5,200. Daily limit breached at $5,000 even though the open trade might recover.
Equity-Based Drawdown directly affects whether you pass or fail a prop firm evaluation. Unlike trading your own account where you can recover from mistakes over time, prop firm rules create hard boundaries -- violate them once and you lose your challenge fee and have to start over. Drawdown rules are the number one reason traders fail prop firm evaluations. Understanding exactly how equity-based drawdown works at your chosen firm is not optional -- it is the foundation of every position sizing decision you make.
Practical example across firms: FTMO and TopStep handle this differently. FTMO is a 2-step firm with static drawdown and a 5% daily loss limit, starting from €155. TopStep is a 1-step firm with trailing drawdown and a 2% daily loss limit, starting from $49. These structural differences mean your approach to equity-based drawdown must adapt to whichever firm you choose.
Common mistake: Traders often assume all drawdown rules work the same way. They do not. The difference between static and trailing drawdown can mean the difference between surviving a losing streak and losing your account while still net profitable. Before starting any evaluation, calculate exactly how much room you have in dollar terms, not just percentages.
Balance-Based Drawdown
A drawdown calculation method that only considers closed trade results, ignoring unrealized profits and losses from open positions. Your balance only changes when trades are closed.
Daily Loss Limit
The maximum amount you can lose in a single trading day before your account is flagged or terminated. This resets each day and is separate from your overall maximum drawdown.
Drawdown Floor
The minimum account balance or equity level before a prop firm terminates the account. If your balance or equity touches this level, the account is immediately closed and the evaluation or funded status is lost.
Stop-Loss
A pre-set order to close a position at a specified price to limit losses. In prop trading, stop-losses are not optional -- trading without them means a single adverse move could breach drawdown limits and terminate the account.
Risk Per Trade
The maximum dollar amount or percentage of account balance you are willing to lose on a single trade. Most prop firm traders risk 0.5-2% per trade to ensure they can withstand losing streaks without breaching drawdown limits.