What is the maximum drawdown rule?

Modified on Thu, 20 Mar at 10:16 AM

TradeDay calculates the Maximum Drawdown limit depending on the type of evaluation you purchased.

TradeDay has three types of Maximum Drawdown limits. An End-of-Day (EOD) limit is calculated from the end-of-day balance, an Intraday Limit is calculated from unrealized balances within the day, and a Static Limit is set at the account creation and fixed. See here for the differences between them.

Trailing max drawdown limits continues to trail your account growth until they reach the starting account balance.

These limits are enforced in real time, regardless of how the limit is calculated. You cannot go below the max drawdown limit with an open position during the trading session, if you do the evaluation will be over.

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How does a Trailing Maximum Drawdown limit work?

A trailing maximum drawdown (TMD) limit is the maximum amount of money you are allowed to lose.

Think of it as a line you will not be allowed to cross.

If you have an open position and you touch the limit, your positions will be liquidated, the trading shut off, and you will have failed the evaluation, or lost your funded trading account.

The trailing maximum drawdown (TMD) is a limit that trails your account growth. It trails up as the account earns profits. If your account balance goes down the next day because of trading losses, the trailing maximum drawdown doesn’t move as it is pegged to the highest balance you have had in your account.

At TradeDay, the TMD amount is set by the program you signed up for.

Below is an example of a trader with a TMD of $3,000.

Trailing max drawdown

On day 1 the account balance is $100,000, the TMD is -$3000. Therefore it is set at $97,000.

By day 2 the trader has lost $1000, the TMD is still $97,000.

On day 4 the trader has made some money and the account balance is $102,000, the TMD has now trailed to $99,000.

On day 5 the trader loses some money, and the account balance is now back to $100,000. Note how the TMD has not moved and is still at $99,000.

On day 6 the trader makes some money, the TMD reaches the starting account balance of $100,000, where it now freezes for the lifetime of the account

For example:

If you join a $100k evaluation program, the starting balance will be $100,000, the TMD will be set at $97,000. When you have an account balance of $103,000 your TMD will be at $100,000 where it freezes, and you are not allowed to go below this balance.

How does a Static Drawdown Limit work?

A Static Drawdown account sets a fixed, unchanging minimum balance or loss threshold, it is a set minimum balance that the account cannot fall below. It does not move or track your account balance growth.

This limit remains constant, irrespective of whether the account's value increases or decreases.

If the account balance drops below the specified limit, the Evaluation is considered failed.

Static drawdown accounts offer traders a clear and predictable risk threshold, making it easier to manage risk and plan trading strategies.

Static Drawdown account example:

For A TradeDay $50,000 Static Drawdown evaluation account, the Static Drawdown is set at $500, so the limit the trader cannot go below is $49,500. As the trader makes profits or losses, the Static Drawdown does not move.

Why do we have a maximum drawdown rule?

Unfortunately, not everyone who tries trading succeeds, and we need a way to measure if your trading strategies are working.

By putting a limit on the amount you can lose, we can track your success and measure your ability to be consistent in your trading.

A drawdown limit is a risk management tool. It's a way for a trading group to manage their risk to a trader. At some point a trading group will want to stop the trader losing money, so they will put in a drawdown limit which will be the maximum they will allow that trader to lose.

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