Critical Levels (Drawdowns)

Critical Levels (Drawdowns)

Critical Drawdown Levels

Drawdown levels are essential for prop firm accounts as they help enforce risk management and ensure traders maintain disciplined trading practices. They act as safety limits to prevent excessive losses, protecting both the trader and the firm's capital.

There are typically two types of drawdowns:

• Maximum Daily Drawdown – The maximum loss allowed in a single trading day, calculated based on the starting balance of that day.
• Maximum Overall Drawdown – The total loss limit from the initial account balance, ensuring long-term risk control.

If your equity falls below these thresholds, the trading account is suspended to maintain responsible trading conditions.

Maximum Daily Drawdown

The Maximum Daily Drawdown is the maximum amount a trader is allowed to lose in a single trading day, set at 5% of the day's starting balance. It tracks your equity (balance + unrealized (floating) profits and losses). This limit resets daily at 00:00 UTC (server time). If the trader's equity falls below this threshold, the trading account will be suspended.

For example, if your starting balance at 00:00 UTC is $100,000, the critical maximum daily drawdown level is $95,000. If the account equity drops below this amount at any time, the trading account will be suspended.

It is important to keep in mind that you can be in profit on your account, but still breach the maximum daily drawdown level which would lead to the trading account being suspended.

Maximum Overall Drawdown

The Maximum Overall Drawdown is the total loss limit a trader can incur, set at 10% of the initial account balance. This means the account's equity (balance + any unrealized profits/losses) must never fall below this threshold.

For example, if you start with a $100,000 account, the critical maximum drawdown level is $90,000. If the account equity drops below this amount at any time, the trading account will be suspended.