Prop firm drawdown rules explained

"5% daily loss, 10% maximum loss" sounds simple. In practice, two firms with those exact numbers can put your account's floor in very different places, because the details — what the percentage is measured from, whether open trades count, when the day resets, whether the limit trails — change the arithmetic. Most breaches happen in those details.

Rules vary by firm and change over time. Treat this as a guide to the questions to ask, and always read your own firm's current rulebook.

The four questions that define a daily loss limit

1. Five percent of what?

Some firms measure the daily limit from the initial account size, others from the balance (or equity) at the start of the day. On a $100,000 account that has grown to $102,000 by this morning:

Measured from	Allowed loss today	Today's floor
Initial account size ($100,000)	$5,000	$97,000
Start-of-day balance ($102,000)	$5,100	$96,900

The difference is small here, but it grows with the account — and it runs the other way after a losing period, when a start-of-day measure gives you less room than you might assume.

2. Balance or equity?

A balance-based limit only counts closed trades. An equity-based limit counts open trades at their current floating value. Under an equity-based rule, a position that dips deep into loss and then recovers can breach the account even though it closed in profit. This is the single most common way traders are surprised.

3. When does the day start?

The reset might be midnight server time, midnight in a particular time zone, or 5pm New York. A trade opened before the reset and still running after it counts against the new day's limit under some rules. If you hold through the reset, know exactly where the new day's floor sits.

4. Does the start-of-day figure include open trades?

If the day's reference point is taken from equity while trades are open, a large floating profit at the reset raises the reference — and gives back that profit counts against the new day. Holding a big winner over the reset can quietly use up most of tomorrow's allowance.

Maximum loss: static or trailing

The overall limit comes in two main shapes.

Static. The floor is fixed at, say, 10% below the initial balance — $90,000 on a $100,000 account — and never moves. Profits give you more room above the floor.

Trailing. The floor follows your highest point. With a $10,000 trailing limit, if the account peaks at $106,000, the floor rises to $96,000. Profits do not give you more room; your cushion is always the same distance from the peak.

Trailing limits have their own variations, and they matter:

• What it trails. The highest closed balance, or the highest equity including floating profit. Equity-trailing means a trade that runs up and comes back can raise your floor permanently without adding a cent to your balance.
• A fixed distance or a percentage of the peak. A 10% trailing limit measured from a $106,000 peak puts the floor at $95,400, not $96,000.
• Whether it locks. Many trailing limits stop trailing once the floor reaches the starting balance, after which they behave like a static limit.

Other rules that catch people out

• Consistency rules. Some firms cap how much of the total profit can come from a single day. One outsized day can delay a payout even with no breach.
• Minimum trading days before a phase is passed or a payout is allowed, sometimes with a minimum profit to count a day.
• News restrictions on opening or closing trades around high-impact releases, on some account types.
• Prohibited strategies such as exploiting price-feed delays or hedging across accounts. These lead to terminations, not just failed phases.

How to trade inside the rules, deliberately

1. Write down your firm's exact definitions for each question above — from the current rulebook, not memory or a forum post.
2. Set your own limit inside theirs. If the firm allows 5% a day, stop yourself at 3% to leave room for slippage and a floating loss you can't close instantly.
3. Size from the floor, not the balance. Your real risk capital is the distance between equity and the nearest floor, daily or overall, whichever is closer.
4. Test against the rules, not just for profit. A Monte Carlo simulation that applies the firm's actual limits tells you how often a strategy would breach at your current risk per trade.
5. Let code enforce it. Discipline is weakest exactly when the limit is closest. A risk module that blocks orders and flattens positions at a defined equity level doesn't have bad days.