Prop Trading: How to Get a Static Drawdown

Prop Trading: How to Get a Static Drawdown

One of the advantages held by prop firms is the relative drawdown rule. This tilts the playing field in favor of the prop firm as the trader cannot just risk profits, as he/she might do with a broker account, otherwise wise known as ta trading with house money.

Instead, when trading a prop account, whether in the test or funded stage, the trader must be aware that there is a drawdown limit based on the high watermark. This is in contrast to a static drawdown calculated from the initial deposit regardless of how much profit is in ther account. Note. There is a broker offering static drawdowns (scroll below).

Let’s take a look at relative vs. static drawdowns

A relative drawdown is determined by how much a trading account has declined vs. its peak point or high watermark. It is shown in percentage terms calculated from the highest account balance.

For example

• Starting account balance $100,000
• 5% relative drawn limit
• Initial drawdown value $100,000 x .05% = $5000.
• At $95,000 ($100,000 – $5000) the account would be in breach of the relative drawdown limit.,
• Now, trader makes $4000 so account balance is $104,000 (high watermark)
• Relative drawdown limit is no longer $95,000 but $98.800 ($104,000 x .95)

A static drawdown in trading is a fixed minimum account balance that does not change no matter how much profit is in the account.

Example:

• Starting account balance $100,000
• 5% static drawn limit
• Static drawdown value $100,000 x .95% = $95,000.
• At $95,000 ($100,000 – $5000) the account would be in breach oif the relative drawdown limit.,
• Now, trader makes $4000 so account balance is $104,000 (high watermark)
• Static drawdown limit stays the same at $95.000 vs. the relative drawdown example that has a limit of $98,800 using the same 5%.

So, you can see the advantage of a static vs. a relative drawdown although both cases would be subject to a maximum daily (%) loss limit

Nevertheless, a static drawdown gives a prop trader a larger cushion before the account would be in breach.

Black Friday special

Prop Trading: How to Get a Static Drawdown

Free Trial – The Amazing Trader Charting Algo System – Click HERE