Most traders who fail a prop firm evaluation don't fail the profit target. They hit the drawdown limit. And the most confusing kind is the trailing drawdown: a loss limit that moves up as your account grows.
What is trailing drawdown?
A trailing drawdown is a loss limit that follows your account balance up but never comes back down. If your account rises, the limit rises with it. If your account falls, the limit stays where it is.
The result: you can be in profit overall and still lose the account, because the floor has moved up underneath you.
A worked example
Say you have a $50,000 evaluation with a $2,000 trailing limit that updates at the end of each day:
| Day | End-of-day balance | Loss limit (floor) | Room left |
|---|---|---|---|
| Start | $50,000 | $48,000 | $2,000 |
| Day 1 | $50,800 | $48,800 | $2,000 |
| Day 2 | $51,500 | $49,500 | $2,000 |
| Day 3 | $50,600 | $49,500 | $1,100 |
| Day 4 | $49,500 | $49,500 | $0, account breached |
On day 4 the account is still $500 below where it started, but it's breached, because the floor rose to $49,500 on day 2 and never came back down.
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Try VOLERON free for 7 daysEnd-of-day vs intraday trailing
- End-of-day trailing: the limit only moves up based on your balance when the day closes. A trade that is up $1,000 and then comes back doesn't move it.
- Intraday trailing: the limit moves with your highest balance during the day, sometimes including open profit. A winning trade that you let turn around can raise the floor and then hit it in the same trade.
End-of-day trailing is much easier to live with. Always check which one your firm uses. With either kind, the breach itself is usually checked in real time, including open losses.
When does it stop trailing?
Many firms stop trailing once the limit reaches your starting balance. In the example above, once you are $2,000 in profit, the floor locks at $50,000 and stays there. From then on, it works like a normal fixed limit.
Topstep, for example, describes its Maximum Loss Limit as rising with your end-of-day balance, never moving down, and locking once it reaches your starting balance. Rules change, so read your firm's current help centre before you trade.
How to protect your account
- Know your room every morning. Write down today's balance, today's floor and the difference before your first trade.
- Size from your room, not your account. $1,000 of room on a $50K account is a $1,000 account for risk purposes. See how much to risk per trade.
- Set a personal daily stop well inside the firm's limits, such as a third of your room.
- Bank the early cushion. The most dangerous stretch is before the limit locks. Trade smaller until you're past it.
- Stop after two losses. Most blown accounts come from one bad day, not one bad trade. See how to stop revenge trading.