Static Drawdown

Key Highlights

Protecting trading capital and maintaining account integrity is a key priority when using a funded account. A static drawdown refers to a fixed limit placed on the total loss that this account can incur, and is normally measured from the starting balance. In a nutshell:

• A loss level refers to the drawdown limit at which the account balance must stay
• The ‘Hard Stop’: It’s a permanent violation that occurs when the account’s balance dips below this level during trading.
• Fixed Floor: It’s a level that doesn’t adjust upwards and will remain anchored at the same point until the moment when you initiate your first payout. 
• Proper risk management within your static drawdown limit will help the trading account remain safe and compliant. 

Static Drawdown

The rigorous process that goes into back testing and honing a trading strategy will often cause traders to ask, ‘Is a funded account really worth it? ‘And the reality is, getting the opportunity to leverage substantial capital without risking your own funds will require a good understanding of prop firm rules.

Top among these rules will be what drawdown limits are and how they work. A drawdown limit essentially helps define how much capital an account can afford to risk before its safety measures kick in. Understanding each of these parameters will enable you to better understand risk management. 

Industry experts have long emphasized that clear risk controls are needed for long-term trading. To help you get started on your journey to becoming a profitable trader, we have prepared a detailed guide on static drawdown, which covers everything you need to know about this prop firm rule. 

How Does A Static Drawdown Future Prop Firm Work?

A static drawdown works by setting a fixed equity (balance) floor once the funded account has become active. Let me use an example to try to explain how this drawdown works.

Let’s say that you have started with a balance of $100,000 in your funded account. The prop firm has, in turn, assigned a 10% static drawdown limit to your trading activities.

What this means is that if the account hits the $90,000 limit, it will be game over for you!

My years in the industry have taught me that this limit will never increase, regardless of how much profit you rake in during trading. Your floor limit will remain static and tied to the opening balance.

By doing this, the prop trading firm will have created a permanent line, which too many traders assume is flexible, leading to failure. In most cases, confusion will set in when the equity has increased.

If, for instance, you’re able to grow your equity to $112,000 from $100,000, it means you have raked in a profit of $12,000. For many traders, the immediate thought will be that they now have additional room.

But this couldn’t be further from the truth. No matter how much profit you make, the floor will remain fixed at the $90,000 mark. As a result, you can only afford to lose $22,000 before breaching the rules. 

What I am trying to say here is that the earlier success recorded by the account doesn’t matter. As soon as your account balance hits the fixed floor limit of $90,000, the prop firm will shut it down!

Audacity's Trading Program

Funded Trader Program

Audacity's Trading Program

Funded Trader Program

How Traders End Up Miscalculating Risks

Watch closely, and you’ll notice that there’s a common pattern that emerges among all funded traders. And it goes like this: disciplined traders rake in early profits, which then lead to improved position sizes. This, in return, leads to improved confidence levels and an eagerness to increase lot sizes.

While some may think that this is a good approach to trading, the hard truth is that the static drawdown doesn’t increase with each recorded win. Do you remember that $90,000 hard floor limit we mentioned earlier? The one that was set when the funded account became active?

Learn more about What is Drawdown in Trading?

That same floor will remain no matter how much profit you make. This means that when you increase your position sizing after having recorded some early wins, you’ll also inadvertently reduce your error margin. What do I mean by this?

In an ordinary $100,000 funded account that has a 0.5% risk per open position, you’ll have the leeway to make about 20 losses before hitting your static drawdown limit. Now, when you increase your risk to 2%, it means you’ll only be able to tolerate five losses before hitting the same limit. 

Looking at this explanation, the math is quite clear: choosing to take on additional risk after recording an early win will leave you with less room for making a mistake.

Understanding How an Account Balance Can Mislead You in a Static Drawdown Model

Free Funded Account Challenge

free prop firm challenge

Free Funded Account Challenge

free prop firm challenge

The psychological trap in a static drawdown will become stronger as the balance in your funded account increases. When your trading dashboard shows that you have $112,000 at your disposal, the urge to trade based on this high number will rise. 

But what you need to understand is that the account’s enforcement mechanism will not account for the prevailing balance: it will only measure how far you have moved from the initial floor. It’s not unheard of to find a funded trader being shocked by the drop in their account, yet they have remained largely profitable. 

You need to understand that the fixed rule doesn’t measure your profits and losses (P&L) curve. It does, however, provide one essential benefit: predictability. It has no moving target, which means that you’re in a position to determine your failure point from your starting position. For those who are able to understand this one rule, it becomes easier for them to model their risk exposure.

Static vs Trailing Drawdown

A trailing drawdown will increase with every new tick made, thus securing your profits while also tightening the risk parameters. On the other hand, you have the static drawdown, which will remain unchanged even after you make consecutive gains. 

A Working Example of a Trailing Drawdown

The difference mentioned above is what determines whether the risk capacity for the account will continue to grow with each profit made or decrease when doing well. A trailing drawdown traditionally follows your account’s equity curve.

If the account has a starting balance of $100,000 and a matching maximum loss value of 10%, the starting floor in a trailing drawdown will be $90,000, as is the case with the static one. However, when your new equity rises to $105,000, the loss limit will be recalculated.

It will now sit at $94,500 to reflect the $5,000 profit made by the account. While at it, the allowable loss limit for the account will reduce from $15,000 to a new $10,500 mark. The trailing drawdown mechanism will continue to track each watermark recorded. 

Many prop trading firms like to combine the 5% daily drawdown limit with the 10% static drawdown limit as a way to create layered risk control. But please be informed that the trailing structure will, in such cases, do away with the daily part, thereby making your overall drawdown dynamic. 

Audacity Capital Empowering Traders Since 2012

Join the Prop Firm

Audacity Capital Empowering Traders Since 2012

Join the Prop Firm

Conclusion

A static drawdown is recommended for traders who prefer to have a say on when and how to safeguard the gains made by their accounts. In this drawdown model, you get to choose when to reduce position sizes, withdraw your gains, and even which type of risks to take after you have hit a new profit level. The prop trading firm doesn’t alter your breach threshold, thus helping provide you with additional room to handle market swings. Audacity Capital is a renowned prop trading firm with a well-curated resources section that helps differentiate between static and trailing drawdown.

FAQ