What Is Drawdown in Trading? Max Drawdown vs Daily Drawdown Explained

Drawdown is one of the most important concepts in trading — and one of the most misunderstood. Most traders know the word but do not fully grasp how it is calculated or why different types of drawdown require different management approaches.

What Is Drawdown?

Drawdown measures the decline from a peak balance to a subsequent trough. It tells you how much you lost from your best point before recovering.

Drawdown = (Peak Balance − Trough Balance) ÷ Peak Balance × 100%

Example:

• Account grows to $12,500 (peak)
• Falls to $10,000 (trough)
• Drawdown = ($12,500 − $10,000) ÷ $12,500 = 20%

Track your daily drawdown limits in real time: Prop Firm Daily Drawdown Calculator

Maximum Drawdown

Maximum drawdown (MDD) measures the largest peak-to-trough decline over the entire history of an account or strategy. It is the single most important risk metric for evaluating a trading strategy.

Why it matters:

• A 50% drawdown requires a 100% return just to get back to flat
• A 25% drawdown requires a 33% return to recover
• A 10% drawdown requires only an 11% return to recover

| Drawdown | Return Required to Recover | |----------|--------------------------| | 10% | 11% | | 20% | 25% | | 30% | 43% | | 40% | 67% | | 50% | 100% | | 60% | 150% |

This asymmetry is why capital preservation is more important than return maximization. The goal is never to have a large drawdown — because the recovery cost is exponentially larger than the loss.

Daily Drawdown

Daily drawdown measures the decline within a single trading day, typically from the starting balance at the beginning of that day.

Formula:

Daily Drawdown = (Start of Day Balance − Current Equity) ÷ Start of Day Balance × 100%

Daily drawdown is the primary rule tracked in prop firm evaluations. FTMO, MyFundedFX, and most other prop firms allow a maximum daily drawdown of 5%.

Critical distinction: Most prop firms calculate daily drawdown on equity (including open floating P&L), not just closed P&L. This means an open losing trade counts against your daily limit even if you haven't closed it.

Maximum Drawdown vs Daily Drawdown: Key Differences

| Feature | Maximum Drawdown | Daily Drawdown | |---------|----------------|---------------| | Time window | Entire account history | Single trading day | | Resets? | Never | Every day | | What it measures | Peak-to-trough decline | Intraday equity decline | | Relevant for | Strategy evaluation, personal accounts | Prop firm rules | | Based on | Closed P&L (usually) | Equity including open positions |

Static vs Trailing Drawdown

Prop firms use two different drawdown models that fundamentally change how you should trade:

Static drawdown: The floor (minimum balance) is fixed from the start. It never changes regardless of your profits.

• FTMO: 10% max drawdown from $100,000 initial balance → floor is $90,000 forever
• MyFundedFX: Same model

Trailing drawdown: The floor rises as your balance increases, up to a point.

• TopStep: Trailing drawdown rises with profits until floor reaches starting balance
• More aggressive early in the account — any early loss hits the floor immediately

The trailing model is significantly harder because you don't have the protection of accumulated profits offsetting your floor until the trail locks.

Why Drawdown Management Determines Long-Term Survival

Consider two traders, each starting with $100,000:

Trader A: Has a −25% drawdown in month 2. Needs +33% just to get back to flat. Likely abandons strategy before recovery.

Trader B: Never exceeds −10% drawdown. Compounds consistently at 2% monthly. At year 5: $267,000.

Trader B's smaller returns feel unimpressive in any single month. But the absence of large drawdowns is the entire mechanism that enables long-term compounding.

Practical Drawdown Management Rules

Set a personal daily limit below the rule limit

If your prop firm allows 5% daily drawdown, stop trading at 3–3.5%. The buffer exists because:

• Slippage can cause a stop loss to fill worse than expected
• Floating losses on open positions count in real time
• News events can cause rapid price movements that bypass stops

Track equity, not just closed P&L

Your brokerage platform shows closed P&L prominently. What matters for drawdown is equity — closed P&L plus all floating P&L on open positions. Make this the number you watch.

Know your account floor

Before any trade, know the absolute number your equity cannot touch:

• $100,000 account, 5% daily limit → floor is $95,000
• At any point during the day, if equity reaches $95,000: stop trading, close everything

Reduce size after a losing streak

Consecutive losses suggest either the market conditions have changed or execution is off. Reduce position size by 50% after three consecutive losses. Resume normal size after two consecutive wins.

Drawdown Calculators

The most effective habit professional prop traders develop is checking their drawdown status before every trade:

• What is my balance right now?
• What is my daily floor?
• How much room do I have?
• Do the size and stop on this trade fit within my remaining budget?

→ FTMO Daily Drawdown Calculator
→ MyFundedFX Drawdown Calculator
→ TopStep Drawdown Calculator

Summary

• Drawdown measures the decline from a peak balance to a trough
• Maximum drawdown tracks the worst peak-to-trough decline in account history
• Daily drawdown tracks intraday equity decline and resets each day
• Prop firms use equity-based daily drawdown — open losses count in real time
• Static drawdown (FTMO) is more forgiving than trailing drawdown (TopStep)
• A 50% drawdown requires a 100% return to recover — capital preservation comes first
• Set your personal stop at 60–70% of the allowed daily limit as a safety buffer