Trailing drawdown in prop challenges: a worked example

[FXS London Scalper]

Many prop challenges use a trailing maximum drawdown. It's often misunderstood, and the misunderstanding ends challenges.

How it typically works: the drawdown limit follows the highest balance or equity reached, at a fixed distance. If the limit is 5% and the account starts at 100,000, the floor is 95,000. If the account rises to 103,000, the floor moves to 98,000. Some firms freeze once the floor hits the initial balance.

A worked example of the trap:

• Start: 100,000, floor 95,000.
• Good week: equity peaks at 104,000 during an open trade, which closes at 102,000.
• If the firm trails on equity, the floor is now 99,000, not 97,000.
• A normal losing streak of 3,000 from 102,000 ends the challenge.

Points to check in the rules:

• Does it trail on balance or on equity, including open profit?
• Does it stop trailing at some point?
• Is it checked live or only at the close of the day?

Equity-based trailing punishes letting winners run and then giving some back. Some traders take partial profits earlier on such accounts for that reason.

Which type does your firm use?