Trailing Drawdown
A hypothetical programme has a USD 50,000 reference account and a fixed USD 2,000 threshold distance below the highest equity observed intraday. The initial floor is USD 48,000. An unrealised increase to USD 51,200 raises it to USD 49,200. A retreat to USD 49,500 leaves just USD 300 of headroom, although the loss from starting capital is USD 500. This example has no trailing cap; a breach occurs when equity ≤ the floor.
The reference high and available headroom
A trailing floor is not the same as a percentage loss from starting capital. First establish the high-water mark under the programme rules: balance or equity, updated intraday or at day-end. Then apply the distance, any trailing cap and the breach rule. With an equity-based floor, unrealised gains can lift the boundary before a trade produces cash. Headroom is the current account measure minus the applicable floor, not profit since inception.
Programme terms change the calculation
Check whether the limit is a cash amount or percentage, includes commissions and financing, changes after withdrawals, or stops trailing at a cap. Identify the reset time zone and any separate daily limit. The model above illustrates arithmetic, not every proprietary trading firm. The account may be simulated, and evaluation or payout rules are not automatically equivalent to client-deposit protections at a broker.
Using the limit before placing a trade
Before submitting an order, account for open positions, shared risk factors and closing costs. Do not treat all remaining headroom as a safe stop-loss budget: gaps and slippage can exceed planned losses. Also model a temporary gain lifting the floor before disappearing. A small positive realised trade need not improve future trading capacity if the reference high increased much more during that position.
Further learning and sources
12.11 Prop trading firms – the alternative and the reality; 9.8 Drawdown: two definitions and the procedure for halting trading.
Diagram and worked example
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