Max drawdown defines the total amount an account can lose from its starting point before it's disqualified, regardless of daily limits. How that ceiling moves — or doesn't — as your account grows is one of the most consequential rule details in prop trading.
Static Max Drawdown
A static (or 'fixed') max drawdown sets the loss limit relative to the initial balance and never moves. If a $100,000 account has a 10% static max drawdown, the account can never fall below $90,000 — no matter how high the balance has climbed in the meantime.
Trailing Max Drawdown
A trailing max drawdown moves upward alongside the highest balance or equity ('high-water mark') the account has reached. If the same $100,000 account grows to $108,000, a 10% trailing drawdown limit now sits at $97,200 — the floor has risen with your peak, not with your realized profits alone.
| Scenario | Static Floor | Trailing Floor (10%) |
|---|---|---|
| Start: $100,000 | $90,000 | $90,000 |
| Peak reached: $108,000 | $90,000 (unchanged) | $97,200 (rises with peak) |
| Later pullback to $99,000 | Safe — well above floor | Breached — below the $97,200 floor is fine, but a pullback to $96,000 would breach |
With a trailing model, growing your account actually raises the bar you must stay above. A trader who runs profits up and then gives half back can breach the rule even while still net profitable relative to the starting balance.
Lock-In Variants
Some firms use a hybrid: trailing drawdown that stops trailing once the account reaches its starting balance (or a defined profit level), after which the floor locks in place like a static limit. This reduces the risk of the floor chasing equity indefinitely as the account grows further.
Balance-Based vs Equity-Based Trailing
- ▸Balance-based trailing only moves the floor when a trade closes in profit — open floating gains don't raise it.
- ▸Equity-based trailing moves the floor with unrealized gains too, meaning the floor can rise intraday and then trap you if price reverses before you close.
Static, trailing, and lock-in trailing drawdown behave very differently as your equity curve moves. Read your firm's specific documentation rather than assuming — the same word 'drawdown' can mean structurally different risk exposure between firms.