Drawdown rules are the single most misunderstood aspect of prop trading. Choosing the wrong firm because you didn't understand how their drawdown works can lead to a blown account even with a profitable strategy. This guide explains everything.
What Is Drawdown?
Drawdown is the maximum amount your account can decline from a reference point before being terminated. It acts as a safety net — or a hard floor — below which your account is automatically closed.
There are two main types: static drawdown and trailing drawdown.
Static Drawdown
Static drawdown (also called "fixed drawdown") means your loss limit is calculated from your initial starting balance and never moves.
How It Works
Starting balance: $100,000 Max drawdown: 10% ($10,000) Hard floor: $90,000
No matter what happens — even if your balance reaches $150,000 — your account only gets terminated if equity drops below $90,000.
Example Scenario
- Start: $100,000 (floor: $90,000)
- Week 1: Balance grows to $108,000 (floor still: $90,000)
- Week 2: Bad week, drops to $99,000 (floor still: $90,000)
- Week 3: Recovery to $112,000 (floor still: $90,000)
- Week 4: Balance at $115,000 (floor still: $90,000)
Firms Using Static Drawdown
- FundedTradingPlus
- FXIFY
- FundedNext (Stellar model)
- Goat Funded Trader
Trailing Drawdown
Trailing drawdown means your loss limit moves upward as your account grows, locking in a portion of your profits. It never moves down.
How It Works
Starting balance: $100,000 Trailing drawdown: 10% ($10,000) Initial floor: $90,000
As your balance increases, the floor increases with it.
Example Scenario
- Start: $100,000 (floor: $90,000)
- Balance hits $105,000 → floor moves to $95,000
- Balance hits $110,000 → floor moves to $100,000
- Balance drops to $104,000 → floor stays at $100,000 (never moves down)
- Balance recovers to $112,000 → floor moves to $102,000
Intraday vs End-of-Day Trailing
Intraday trailing: The floor updates with every tick. If your equity briefly touches $115,000 during a trade but closes at $108,000, the floor has already moved to $105,000.
End-of-day (EOD) trailing: The floor only updates based on the closing balance at the end of each trading day. Intraday spikes don't affect the floor.
EOD trailing is much more favorable for traders. You don't get penalized for running trades that have momentary unrealized profits.
Firms Using Trailing Drawdown
- FTMO (funded accounts)
- Most futures prop firms (Bulenox, My Funded Futures, TakeProfitTrader)
Static vs Trailing: Side by Side
| Aspect | Static | Trailing |
|---|---|---|
| Floor movement | Never moves | Moves up with balance |
| Risk after profits | Decreases | Stays constant or increases |
| Best for | Swing traders, hold-and-grow | Scalpers, consistent daily profits |
| Psychological pressure | Lower | Higher |
| Firm advantage | Less protective | More protective |
The "Trailing Drawdown Trap"
Here's the scenario that catches most traders:
- You start with $100K and a 10% trailing drawdown (floor: $90K)
- You trade aggressively and reach $115K quickly
- Your floor has trailed up to $105K
- You now only have $10K of room — same as the start
- But the psychological pressure is higher because you've "made" $15K
- You get greedy or complacent, have a losing streak
- You hit $105K and lose the account
Which Is Better?
Static drawdown is objectively better for traders. It gives you more room to breathe, reduces psychological pressure, and doesn't penalize you for being profitable.
Trailing drawdown exists because it protects the firm. It ensures traders don't build up a large buffer and then gamble recklessly.
When comparing firms, always consider the drawdown type as a major factor. A firm with a 10% static drawdown is more favorable than a firm with a 10% trailing drawdown, even if other features are similar.
How to Trade With Trailing Drawdown
If you choose a firm with trailing drawdown:
- Be aware of your floor at all times — Track it on a spreadsheet
- Don't chase profits aggressively — Each new high raises your floor
- Withdraw profits early — Take payouts as soon as eligible to lock in gains
- Use EOD trailing if available — Much more forgiving than intraday
- Set personal stop limits well above the trailing floor
Conclusion
Understanding drawdown is non-negotiable for prop traders. Static drawdown gives you more freedom and safety. Trailing drawdown requires more discipline and awareness. Choose the type that matches your trading style, and always know exactly where your floor sits before placing a trade.
Compare drawdown types across all firms on our rules comparison page.