The Textbook for Prop Firms EP03 | Complete Understanding of Drawdown

Last updated: March 17, 2026

“What is a daily drawdown?” “What’s the difference between a daily drawdown and maximum drawdown?” “I’ve heard that trailing drawdown is risky, but why?”—The drawdown (loss limit) rule is the first hurdle that traders face when taking on the challenge of a prop firm.

In fact, many traders who do not correctly understand the drawdown rule have met the sad ending of “being disqualified before reaching the profit target.” Before the skill of generating profits, the knowledge to avoid disqualification is the first step in conquering prop firm challenges.

In the previous Episode 2 “Complete MT4/MT5 Setup Guide,” we prepared the trading tools, and in this episode, we will thoroughly explain the “drawdown” that you must absolutely grasp before starting your trades. We will illustrate the four concepts of daily drawdown, maximum drawdown, static, and trailing with specific numerical examples.

【Conclusion】Beginners can greatly reduce the risk of disqualification by choosing a “static” prop firm

Teacher! Are there several types of drawdowns? My head is about to explode…

Don’t worry. There is only one thing you need to remember—If you choose a “static” company, even as a beginner, you can trade without worrying about drawdown. I’ll explain it in order.

Let me tell you the conclusion first. Prop firm drawdown rules can be broadly divided into 4 types, but the point that beginners should be most careful about is the difference between “static” and “trailing”.

For example, Fintokei adopts a static system, so the disqualification line calculated from the initial balance does not change. In other words, the more profits you make, the wider the distance between the disqualification line, so you can trade with psychological ease.

On the other hand, in companies that adopt the trailing system, as profits increase, the disqualification line also rises accordingly, so there is a risk that “I was disqualified just because of a slight adjustment, even though I made a profit.”

Understanding this difference is critical to determining life and death in prop firms. Now, let’s delve into the mechanisms of each drawdown one by one.

What is Drawdown? | The Concept That FX Beginners Should Understand First

Is drawdown the same as “unrealized loss”? Or is it the same as “stop loss”? I still don’t quite understand…

That’s a good question. Drawdown is neither “unrealized loss” nor “stop loss,” but a numerical value that represents how much the account has decreased from its peak. In prop firms, this serves as the criterion for disqualification.

Basic Definition of Drawdown

Drawdown refers to the decline in account balance from the peak (highest value). As a general trading term, it means the “rate of fund decrease,” but in prop firms, drawdown functions as the “disqualification condition,” so it is a much more important concept than in normal FX trading.

In a normal FX account, even if the drawdown becomes large, it is just a “decrease in funds” (of course, this itself is a problem). However, in prop firms, the moment the predetermined loss limit (= drawdown limit) is exceeded, the challenge is disqualified, and all previous profits are lost.

Drawdown Calculation Method (Basic Formula)

Calculating drawdown is very simple.

It is important to note that drawdown is calculated based on the “peak balance,” not the “initial capital” in some cases. This difference is the essence of “static” and “trailing,” which will be explained in more detail later.

The Two Types of Drawdown in Prop Firms

The drawdown rules set by prop firms are broadly managed on two time axes.

Remember that daily drawdown is the “daily limit” and maximum drawdown is the “overall limit.” If either one of them is violated, it will result in immediate disqualification. It’s like having a double restriction of “the daily loss is within 5%, and the cumulative loss is within 10%.”

Why Do Prop Firms Have Drawdown Limits?

You may think, “I can manage the loss myself, so I don’t need a rule.” However, the reason prop firms have drawdown limits is clear.

• Risk Management Evaluation: Prop firms have a business model of “entrusting funds and managing them,” so they need to filter out traders who take excessive risks.
• Prevent Large Losses: To prevent a situation where the majority of funds are lost in a single runaway trade.
• Discipline as a Professional: Drawdown limits also exist for institutional traders. Prop firms are recreating this pseudo-condition.

In other words, the drawdown rule is not to “torment traders,” but to “serve as a filter to test whether they can operate as professionals.” Understanding this will allow you to view the drawdown limit not as a negative, but as a condition to be cleared proactively.

Fully Understand the Daily Drawdown (Daily Loss Limit)

Daily drawdown just means “if you lose more than 5% in a day, it’s no good,” right? That’s easy!

The concept itself is simple, but “what to use as the basis for calculating the 5%” and “when it resets” need to be understood accurately, or you may fall into unexpected pitfalls.

What is Daily Drawdown?

Daily Drawdown refers to the maximum allowable loss amount in a 24-hour period. Most prop firms set it at -5%.

For example, in an account with an initial capital of $100,000, a daily drawdown of -5% is $5,000. In other words, if you lose more than $5,000 in a day, you will be immediately disqualified.

Daily Drawdown Calculation Basis

This is the most important point to note. The calculation basis for daily drawdown varies depending on the prop firm.

It’s also important to understand the difference between “balance” and “equity.”

• Balance: The account balance reflecting all closed trades. It does not include unrealized P/L.
• Equity: The balance including the current unrealized P/L. It fluctuates in real-time.

For example, if the balance is $102,000 and there is $1,000 in unrealized profit, the equity is $103,000. In a Pattern A prop firm, this $103,000 may be the basis.

Fintokei’s Daily Drawdown Calculation Method

In Fintokei’s rules, the daily drawdown is calculated as follows.

Let’s look at a specific example.