Does Your Strategy Fit a Funded Account's Rules?

[Fairman]

Does Your Strategy Fit a Funded Account's Rules?

A funded evaluation allows a maximum daily loss of 5 percent and a maximum total drawdown of 10 percent, with a profit target of 8 percent. Your strategy has a historical maximum drawdown of 12R and a longest losing streak of 8 trades. What risk per trade fits?

Start with the drawdown. If you risk 1 percent per trade, a 12R drawdown is 12 percent, which exceeds the 10 percent limit. You would fail the evaluation on the historical worst case.

Try 0.5 percent per trade. A 12R drawdown is 6 percent, within the limit. An 8-trade losing streak costs 4 percent, within the daily and total limits. The profit target of 8 percent requires 16R at this risk, which may take many trades.

Now consider the daily limit. With 0.5 percent risk, you would need ten losses in one day to reach 5 percent, unlikely, so the daily limit is safe.

Add a margin for safety. The historical maximum drawdown is a floor, not a ceiling, as the earlier Monte Carlo drill showed. If the true worst case is 1.5 times the historical figure, 18R at 0.5 percent is 9 percent, close to the limit. A risk of 0.4 percent gives 7.2 percent.

The cost is time. At 0.4 percent, the 8 percent target needs 20R.

Check whether the rules measure drawdown on equity or balance, and whether it is static or trailing.

Exercise: compute the risk per trade that keeps your worst-case drawdown at 70 percent of a firm's limit.

[FXS HongKong Scalper]

Using the historical worst case as a baseline is sensible, but future drawdowns can be larger. Adding a margin, for example assuming 1.5 times the historical maximum drawdown, gives a more cautious estimate.

[Fairman]

The calculation shows why historical drawdown is the starting point. At 1 percent risk, a 12R drawdown is 12 percent, which would fail the 10 percent limit on a repeat of the strategy's worst historical period. Halving the risk to 0.5 percent brings it to 6 percent, which fits. That's a simple but powerful check that many traders skip before buying an evaluation. If the strategy's past worst case already breaks the rules at the trader's usual risk, the evaluation is likely to fail at some point, even if the strategy is profitable over time.

[Amanhasnoname]

My own numbers for the exercise: my strategy had a historical maximum drawdown of 9R and a longest losing streak of 6. Multiplying by 1.5 for safety gives 13.5R. To keep that at 70 percent of a 10 percent limit, I need 7 percent divided by 13.5, about 0.52 percent, so I rounded down to 0.5 percent. The daily limit of 5 percent would need 10 straight losses in a day, while my worst streak of 6 costs 3 percent.

The part people miss is open risk. If two trades are open and the market goes against both, the equity drawdown counts them together, so I cap total open risk at 1 percent, not 0.5 per trade. Many firms measure on equity, so floating losses count before a trade is even closed.

At 0.5 percent and an expectancy of 0.25R, the 8 percent target needs around 64 trades, about six weeks for me.

[Fairman]

The safety margin is important. A historical maximum drawdown is one observation, and the future worst case is likely to be larger, especially over a long period of trading. Multiplying by 1.5 is a reasonable rule of thumb. Some traders use a Monte Carlo simulation to estimate the 95th percentile drawdown instead, which gives a more data driven margin. At 0.4 percent risk, an 18R drawdown costs 7.2 percent, leaving a comfortable buffer under the 10 percent limit. The trade off, as the post notes, is that the 8 percent target then needs 20R, which takes longer to accumulate.

[Fairman]

The daily limit check is a good inclusion. At 0.5 percent risk, ten losses in one day would be needed to breach 5 percent, which is very unlikely for most strategies. But if the strategy takes many trades a day, or if positions can lose more than 1R through slippage during news, the daily limit could come into play. Also, if the daily limit counts floating losses on open positions, several positions open at once could approach it even if none has closed. Checking the worst case for simultaneous open trades is worth adding to the analysis.

[Fairman]

Checking whether drawdown is measured on equity or balance, and whether it's static or trailing, is essential. A trailing drawdown on equity is the strictest version, since it rises with every new equity peak, including unrealised profits. Under that rule, a trader who is up 5 percent and then gives back 5 percent may have used half their drawdown allowance. The funded account rules thread works through this in detail. Has anyone here recalculated their risk per trade based on an evaluation's rules? I'd be interested in what risk level you settled on and whether it helped.