Drawdown (Prop Firm)

Detailed Explanation

Drawdown is the most critical risk parameter in prop trading. There are three main types: (1) Daily drawdown — the maximum loss allowed in a single trading day (typically 4%–5%); (2) Maximum drawdown — the total loss allowed from the initial balance (typically 8%–12%); (3) Trailing drawdown — a dynamic limit that moves upward as your account grows, locking in a higher floor. Breaching any drawdown limit results in immediate account termination. Understanding whether a firm uses static or trailing drawdown is essential before purchasing a challenge.