A trailing drawdown is a minimum account balance that will increase as you make profitable trades.
It is different from the daily drawdown.
Your account will be auto-liquidated if you hit or exceed the trailing drawdown.
Trailing drawdown in practical terms:
- Know the trailing drawdown for the evaluation in which you are participating. For this example, we will assume that your evaluation has a trailing max drawdown of $3,000
- Understand how it moves. Simply put, it always moves up and never down. The trailing max drawdown is calculated at the end of the trade, which increases your peak equity.
The following example is an evaluation with a trailing drawdown of $3,000 with a starting balance of $100,000 buying power.
Trading Day #1
a.) Trade #1, you make $2,500.
b.) Trade #2 you lose $500 with an end-of-day PnL (not including commissions) of $2,000
End of day trading balance (before commissions) is $102,000.
As you enter the next trading day, your trailing max drawdown increased by $2,000 from the lowest point ($97,000) and has now been adjusted to a max trailing drawdown of $99,000.
Trading Day #2
a.) Trade #1 you lose $1,500 and stop trading.
End of day trading balance (before commissions) is $100,500
As you enter the next trading day, your trailing max drawdown remains at $99,000.
Putting it all Together | Daily Max and Trailing Max Drawdown
We will use the same example as discussed in the above paragraph.
On this day, the daily loss limit is $1,000.
Remember, the smaller number between the drawdown and max trailing drawdown is always applicable.
Trading Day #1
a.) Trade #1, you make $2,500,
b.) Trade #2 you lose $500 with an end-of-day PnL (not including commissions) of $2,000
End of day trading balance (before commissions) is $102,000
As you enter the next trading day, your trailing max drawdown increased by $2,000 from the lowest point ($97,000) and has now been adjusted to a max trailing drawdown of $99,000
Trading Day #2
a.) Trade #1, you lose $1,000, and your evaluation has been auto-liquidated due to the violation of the daily loss limit.
Even though you did not violate the trailing max drawdown, the daily loss limit rule was violated, and your account was auto-liquidated.
Tips to Manage Daily and Trailing Max Drawdown
- First, you need to know exactly where you are to start the day. Which drawdown rule will you need to adhere to; Daily loss limit or trailing max drawdown? Remember, the value which is closest to your starting balance is most applicable.
- Best practices dictate that you set a stop loss limit that is safely within the drawdown limits.
- Remember the daily loss limit cannot be hit or exceeded during the trading day or your account will be liquidated and will be deemed ineligible for funding.
- Monitor your drawdown using the TradeFundrr dashboard. The dashboard will provide you with live up-to-date information.