Understanding Drawdown Rules in Prop Trading
Drawdown rules are the most critical factor in prop trading success. Learn the three main types and how they impact your trading strategy.
What is a Drawdown?
A drawdown is the maximum amount your account can lose before you violate the prop firm's rules. Think of it as your "risk buffer" - the distance between your current account balance and the point where you'd breach the firm's risk limits. For example, if you start with a $50,000 account and have a $2,000 drawdown limit, your account can never drop below $48,000 without violating the rules. However, how this limit is calculated varies significantly between prop firms.
End-of-Day (EOD) Drawdown
EOD drawdown rules only check your account balance at the close of each trading day. This is the most flexible drawdown type for aggressive day traders.
How It Works
Starting balance: $50,000
Drawdown limit: $2,000
Violation threshold: $48,000 at end of day
During the trading day, your account could drop to $47,000, $45,000, or even lower - as long as you close out positions and end the day above $48,000, you're safe.
Best For:
- Day traders who close all positions before market close
- Scalpers who take large intraday positions
- Traders who use wide stop losses but manage risk actively
Watch Out For:
- Must actively manage positions before market close
- Can't hold losing positions overnight hoping for recovery
- Requires discipline to cut losses before EOD if needed
Trailing Drawdown
Trailing drawdown moves up as your account grows but never moves down. This protects your profits but can feel restrictive.
How It Works
Starting balance: $50,000
Drawdown limit: $2,000
Initial violation threshold: $48,000
If you grow your account to $52,000, your drawdown line "trails" behind and moves up to $50,000. You've locked in that profit - your account can never drop below $50,000 without a violation, even though you started at $50,000.
Best For:
- Conservative traders who compound gains slowly
- Swing traders holding positions multiple days
- Traders who want their profits "locked in"
Watch Out For:
- Once you hit a new high, you can't give back profits beyond the drawdown amount
- Can force position sizing down after winning streaks
- Less forgiving for traders with high win rate but occasional large losses
Static Drawdown
Static drawdown is checked in real-time and never moves. It's the most restrictive type but also the most predictable.
How It Works
Starting balance: $50,000
Drawdown limit: $2,000
Violation threshold: $48,000 (checked constantly)
Your account can never drop below $48,000 at any point, day or night. Even if you grow to $60,000, the violation threshold stays at $48,000. No flexibility, but completely predictable.
Best For:
- New traders who want predictable rules
- Traders who use tight stop losses
- Risk-averse traders who prefer clarity over flexibility
Watch Out For:
- Least flexible - no intraday drawdowns allowed
- Can't scale into large positions
- Requires conservative position sizing at all times
Which Drawdown Type is Best?
There's no universal "best" drawdown type - it depends entirely on your trading style:
Quick Decision Guide
Choose EOD Drawdown if:
You're an aggressive day trader, scalper, or use large intraday positions
Choose Trailing Drawdown if:
You're a swing trader, hold overnight positions, or want profits protected
Choose Static Drawdown if:
You're new to prop trading, use tight stops, or want maximum predictability
Most experienced day traders prefer EOD drawdown for its flexibility, while conservative traders often choose trailing drawdown for the profit protection. Static drawdown is falling out of favor but remains the clearest option for beginners.
Compare Firms by Drawdown Type
Use our comparison table to find prop firms with your preferred drawdown rules.
Compare Prop Firms