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9.1 Daily Drawdown (Equity vs Balance)
The Daily Drawdown rule is the number one reason traders fail Prop Firm evaluations. It is a strict mathematical limit on exactly how much money you are allowed to lose in a single 24-hour trading day. If you breach this limit by even a single penny, your account is instantly and permanently disabled.
The standard Daily Drawdown limit is 5%. However, the trap lies in how that 5% is calculated. Is it 5% of your initial starting balance? Or is it 5% of your floating equity? Understanding the difference is the key to survival.
The Trap: Equity-Based Drawdown
Most strict prop firms calculate your Daily Drawdown based on your highest floating Equity (open trades) during the day, NOT your closed Balance.
Imagine you have a $100,000 account with a 5% ($5,000) daily drawdown limit. You enter a Buy trade. The trade goes deep into profit! Your open, floating balance hits $104,000. You are thrilled, but you don't close the trade. Suddenly, the market violently reverses. The trade drops back down, and you eventually close it at $99,000 (a $1,000 loss from your starting balance).
You might think: 'I started at $100k, closed at $99k, I only lost $1,000, so I'm safe from the $5k limit.' WRONG. YOU ARE FIRED. Because your floating equity hit a high of $104,000, the firm calculates your daily drawdown from that high point. $104,000 minus $99,000 is a $5,000 loss. You hit the daily drawdown limit, even though your closed balance only dropped 1%.
Balance-Based Drawdown (The Safer Alternative)
Some newer, more trader-friendly prop firms (like FundedNext) use 'Balance-Based Drawdown'. In this model, your 5% limit is calculated strictly at midnight based on your closed balance. If your balance starts at $100k, you are allowed to drop to $95k, regardless of what your floating trades did during the day. Always read the FAQ of your chosen firm to know which drawdown metric they use.
Self-Evaluation Check
1. What is the primary consequence of breaching a Prop Firm's Daily Drawdown limit?
2. What does an 'Equity-Based' Daily Drawdown track?
3. If you start the day at $100k (with a 5% equity drawdown limit), your open trade goes up to $104k in profit, but then crashes back down and you close it at $99k, what happens?
4. How does 'Balance-Based' Drawdown differ from Equity-Based?
5. Why do Prop Firms enforce Daily Drawdown rules?