Maximum Daily Drawdown
Quick Definition
The maximum permissible equity or balance drop allowed within a single trading day, calculated either from the previous day's balance or equity high watermark.
Detailed Explanation
In proprietary trading firms (such as FTMO, FundedNext, and The5ers), Maximum Daily Drawdown is the single most critical risk parameter. If your floating or closed equity falls below this threshold (typically 4% to 5%) at any point during the 24-hour server cycle, the account is automatically breached. Calculating lot sizes to stay comfortably below this ceiling is vital for algorithmic EAs.
Key Trading Rules & Takeaways
- Typically fixed at 4% - 5% of starting daily balance or equity.
- Breaching this rule immediately invalidates evaluation and funded accounts.
- Automated EAs must feature daily loss circuit breakers to shut down trading before reaching this limit.
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Frequently Asked Questions
Is daily drawdown based on equity or balance?
Most prop firms calculate daily drawdown based on the higher of starting equity or balance at server midnight reset, meaning floating open losses count toward the limit.
How can algorithmic EAs prevent daily drawdown violations?
By embedding hard daily loss equity stops (e.g., closing all positions and halting trading if equity drops by 3.5%).