Maximum Drawdown Explained for Prop Firm Traders
Maximum drawdown is the largest drop in an account's value, measured from a high point to a following low point, before a new high is reached. In a prop firm evaluation it is also a rule: if your account falls by more than the allowed amount, the attempt ends.
Drawdown is the number that decides most evaluations. This guide shows the formula, the difference between static and trailing drawdown, and worked examples you can copy into your own plan.
The definition
Drawdown measures how far your balance (or equity) falls from a peak.
Formula
Drawdown % = (Peak value - Lowest value after the peak) / Peak value x 100
Maximum drawdown is the largest drawdown across the whole period you are measuring.
Example
Your account rises from $1,500 to $1,620, then falls to $1,530 before rising again.
- Peak = $1,620
- Low after the peak = $1,530
- Drop = $90
- Drawdown = 90 / 1,620 = 5.6%
If that is the biggest fall in the period, 5.6% is your maximum drawdown.
Why prop firms use it
A drawdown limit caps how much risk you can take with the firm's capital. Firms usually set two limits:
- Daily loss limit: the most you may lose in one day.
- Maximum drawdown: the most the account may fall overall.
Both are checked continuously. Breaking either one ends the evaluation or the funded account.
Static vs trailing drawdown
This is the detail that catches most traders. Check which type a firm uses before you pay.
| Static (fixed) | Trailing | |
|---|---|---|
| Reference point | Starting balance | Highest balance reached |
| Floor moves up as you profit? | No | Yes |
| Room to lose after profits | Grows | Stays the same or shrinks |
| Simplest to plan with | Yes | Harder |
Worked example: $1,500 account, 8% maximum drawdown
The 8% limit equals $120.
Static: the floor is always $1,500 - $120 = $1,380, no matter how much you earn. If you grow the account to $1,700, you can lose up to $320 before hitting the floor.
Trailing: the floor follows your highest balance. If you grow to $1,700, the floor becomes $1,700 - $120 = $1,580. You have only $120 of room, however much profit you made.
Same percentage, very different risk. Read the firm's rules for the exact definition. You can see ZyroPilot's current limits on the rules page.
Daily loss limit example
With a 4% daily loss limit on a $1,500 account, the most you can lose in a day is $60. Add this to your own plan:
- Stop trading for the day at about half the limit ($30), so one bad trade cannot finish the attempt.
- Do not increase trade size after a loss.
How to calculate your maximum drawdown in a spreadsheet
- List your balance after each trade in column A.
- In column B, calculate the running peak:
=MAX(B1, A2)(starting with B1 = A1). - In column C, calculate the drawdown for each row:
=(B2 - A2) / B2. - Your maximum drawdown is the largest value in column C:
=MAX(C:C).
How to stay inside the limits
- Risk a fixed percentage per trade. A common range is 1-2% of the account.
- Cut size after losses, not after wins. Many traders do the opposite.
- Set a personal daily stop below the firm's limit.
- Know your worst case. If you lose 5 trades in a row at 2% risk, you are down roughly 10%. That would break an 8% limit.
- Track it in your journal. Our guide to passing a funded account evaluation includes a journal template and the main failure patterns.
For more on sizing and risk, read the prop firm risk management guide.
Frequently asked questions
What is maximum drawdown in simple terms?
It is the biggest fall in your account value from a peak to a later low. It shows how much you could have lost at your worst moment.
How do you calculate maximum drawdown?
Take the peak value, subtract the lowest value after it, divide by the peak and multiply by 100. The largest result over your period is your maximum drawdown.
What is the difference between daily drawdown and maximum drawdown?
Daily drawdown is the limit for one day. Maximum drawdown is the limit for the whole account. You must respect both.
Is trailing or static drawdown better for traders?
Static is easier to plan with because the floor does not move. Trailing gives you less room as you profit. Neither is better by itself; know which one applies.
What happens if I hit the maximum drawdown?
The evaluation or funded account is normally closed under the firm's rules. Confirm the exact terms before you start.
Does drawdown include open trades?
Many firms measure on equity, which includes open positions. Check the firm's definition, because it changes how quickly you can breach a limit.
Important
Trading binary options is high risk. This article is educational and not financial advice. Check each firm's current rules before you pay. ZyroPilot's services are not available in all countries; see restricted countries.
