Drawdown refers to a decline or reduction, particularly in the context of financial markets, where it represents the worst sequence of cumulative losses. Specifically, it measures the largest drop from the peak to the trough on a return curve.
Prop firms, as our team at Trading Funder has observed, frequently use drawdown in their funded trading programs to assess the maximum loss a trader can sustain. This metric also helps these firms gauge the volatility that a trader’s capital has undergone before reaching their ultimate trading objectives.
Trailing Drawdown vs EOD Drawdown
What does a trailing drawdown mean?
A trailing drawdown can be defined as a stop loss that is assigned to a trading account and is continuously moving. It could also be used to refer to a moving value that determines the minimum account balance that a trader is allowed to have at any point of operating the trading account.
The peculiar thing about the trailing drawdown is that it is not static but constantly moving during trades. This is why if the trader’s account balance is equal to or less than the minimum balance allowed by the trailing drawdown, such an account will be terminated.
The trailing drawdown is always moving relative to the highest account balance at any point of the trading day. So, the more a trader makes profits, the higher the value of the trailing drawdown. But when the trader incurs losses, the trailing drawdown remains unchanged.
What does EOD drawdown mean?
The EOD drawdown is similar to the trailing drawdown except that it is only calculated at the end of a trading day, hence the name EOD which means “end of day”. It is not calculated during trades or at the end of trades like the trailing drawdown which is why it is different. This is the trailing drawdown used by Uprofit proprietary firm and it is known as Pro Drawdown.
How does the Pro drawdown work at Uprofit?
As mentioned earlier, the Pro drawdown at Uprofit works like the EOD drawdown which is why it only considers the profits made once a trading day comes to an end. Also, it is updated any time the trader’s account balance achieves a new high at the end of any trading day.
Uprofit adopts this method of calculating the drawdown to ensure that its traders can trade freely and make the most of the trading opportunities available. Traders can do this without worrying about a trailing drawdown that will consider both earned and unearned profits as the Pro drawdown only considers the profits earned at the end of the trading day.
Example of how the Pro drawdown works at Uprofit
For this example, we will assume the trader is trading with a 100K account with a Pro drawdown of $3,000. We will examine how the Pro drawdown is calculated for successive days of trading.
Day 1: the trader has an open position balance of $100,700 but then closes the position with a balance of $100,000. The Pro drawdown at the end of the trading day is thus $97,000.
Day 2: the trader has an open position balance of $100,900, but he didn’t take that profit, he even made losses, then closed the position with a balance of $98,500. The Pro drawdown at the end of the trading day remains $97,000.
Day 3: the trader abstains from making any trades and so closes with the same balance from the previous day at $98,500 which means the Pro drawdown is still the same at $97,000.
Day 4: at some point during the trading day, the trader has an open position with an account balance of $103,000. But by the time the position is closed, the account balance is $100,000. The Pro drawdown at the end of the trading day is still $97,000.
Day 5: at some point during the trading day, the trader has an open position with an account balance of $104,000, but then ends up closing the position with a balance of $103,000. The trader’s Pro drawdown is thus $100,000 at the end of the trading day.
From the above example, it is clear that the Pro drawdown does not consider the potential profits but only the actual profits at the end of the day.
Questions and answers about the Uprofit Pro Drawdown
When does the Drawdown stop trailing?
The drawdown stops trailing when the drawdown limit reaches the initial balance either in the challenge or in the funded account.
Will I lose my account if I reach the Pro Drawdown?
Yes, you will lose your account if you reach the Pro drawdown. This is because once your account balance reaches or goes below the Pro drawdown, the account will be liquidated and closed. It is not allowed for a trader’s account balance to experience a loss that is beyond the Pro drawdown at any point during the trading day.
I didn’t reach the Pro Drawdown, but my account was liquidated! Why?
If this should happen, that means you have violated the daily loss limit rule. The daily loss limit rule refers to the highest amount of loss that a trader is allowed to suffer for any specific trading day.
All the different account sizes have a daily loss limit assigned to them and traders are expected to abide by this rule. Sometimes, traders fail to pay attention to this rule and as such they find their accounts liquidated. The rule is there to ensure that traders are disciplined and adopt excellent risk management strategies.
Summary
Drawdown measures are critical in funded trading programs to ensure that traders manage risk effectively. At Trading Funder, we emphasize the importance of understanding the two main types of drawdowns: Trailing Drawdown and End of Day (EOD) Drawdown. A Trailing Drawdown continuously tracks a trader’s highest balance, adjusting the allowed loss threshold during active trades. In contrast, an EOD Drawdown, like Uprofit’s Pro Drawdown, only adjusts at the close of a trading day, offering more flexibility. Uprofit’s Pro Drawdown allows traders to focus on actual profits at day’s end without worrying about intraday fluctuations. However, reaching this drawdown will result in account closure, so careful risk management is essential for success.
