Drawdown calculations are the most critical aspect of prop trading. While daily drawdown limits restrict your daily losses, the way a firm calculates your maximum drawdown determines the long-term survival of your account. In this article, we explain daily drawdown versus maximum drawdown and explore why static floors are superior.
Daily Drawdown Explained
The daily drawdown limit is a dynamic threshold that resets every 24 hours. Typically set at 5% of the starting balance or the daily starting equity, this rule ensures that you do not blow the account in a single day. If you start the day with $100,000, your daily loss limit is $5,000, meaning your equity cannot drop below $95,000 before the daily reset time.
Maximum Drawdown: Trailing vs. Static Floors
While daily drawdown resets every day, maximum drawdown is the overall cap on losses allowed on your account (usually 10%). Prop firms calculate this in two ways:
1. Trailing Drawdown (The Trap)
In a trailing drawdown model, your maximum loss limit trails behind your highest closed balance or open equity. If you buy a $100,000 account and make $5,000 profit, your trailing drawdown floor moves up from $90,000 to $95,000. If you subsequently lose that $5,000 profit, your account is suspended because your equity touched the new $95,000 floor. This model aggressively traps traders as they make profits.
2. Static Drawdown Floor (The Fair Model)
A static drawdown floor stays at its original level, regardless of how much profit you accumulate. If you buy a $100,000 account with a 10% maximum drawdown, your floor is fixed at $90,000. If your balance grows to $110,000, your floor remains at $90,000. You now have a comfortable $20,000 buffer of risk tolerance. At Funded Nyx, we use a static drawdown floor to give our traders the best possible chance to succeed.
Conclusion
When choosing a prop firm, always verify their drawdown calculations. Avoid trailing drawdown traps and choose firms like Funded Nyx that protect your hard-earned profits with static floor models. Check out our Evaluation Packages and secure your static drawdown account today.
Frequently Asked Questions
What is balance-based drawdown?
Balance-based drawdown calculations are based purely on closed trade balances, rather than floating equity fluctuations, preventing accidental breach from market volatility.
Why does Funded Nyx use static drawdown floors?
We believe in fairness. Trailing drawdown models are designed to make traders fail. Our static floor stays where it was initialized, giving you wider room to trade safely.