Static Drawdown Vs Trailing Drawdown

Key Highlights

The key to becoming a good trader lies in knowing all the rules. To get started on this, you need to understand the differences between static and trailing drawdowns. In a nutshell:

• Static drawdown: Static drawdown allows you to make larger trades with a less stressful risk management strategy. 
• Trailing drawdown: It trains you to make money, and while it can make it harder for you to pass an evaluation, it’s the best drawdown for a scalper. 

Static Drawdown Vs Trailing Drawdown

Risk management is an essential and unavoidable part of prop trading. And knowing how to run the comparison on static drawdown vs trailing drawdown will make a real difference when it comes to protecting your funded account. 

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In this guide, I will demonstrate why prop trading isn’t all about making money. It’s also not about losing too much of what you have. And this is the beauty of drawdowns!

Once you become a funded trader, you’ll need to learn to respect the rules. Get this from someone who has been there before: underestimating the drawdown rules will lead to rule violations. 

What’s more worrying is that this tends to happen without you even realizing. And believe me on this, unexpected rule violations are way too common. 

Read on to learn the differences between static and trailing drawdown, and the key features of each. 

What Is a Drawdown?

If you’re just getting started, a drawdown refers to the maximum amount that a funded trader account can dip to before it gets disqualified or terminated. If it helps, you can think of it this way - a drawdown is a danger zone. Once you pass it, you’re out. And if you’re still confused, picture a roller coaster!

Understand this better here Daily Vs Max Drawdown

In the course of your trading, the account will go up, down, then up again. That “dip” that will happen between your highest and lowest point is what prop firms call the drawdown. Prop trading firms have rules in place to restrict how deep your dips can be.

Your ability to manage drawdowns will, therefore, help protect your account, as well as the firm’s capital. Please remember that each firm will do this differently, hence the need to understand the different types of drawdowns and how they’re calculated.

Learn more about Drawdown in Prop Trading

What Is Static Drawdown?

A static drawdown refers to your maximum loss, which is anchored to the initial account balance. More importantly, this drawdown doesn’t change even when the account makes profits. And unlike the trailing drawdown, the funded account’s threshold will remain constant for the duration of the trading period. This helps provide a clear and unchanging safety trading floor. 

Key Aspects of a Static Drawdown

• Risk Management: The static drawdown is designed to provide you with a clear and unchanging stop-out level, explaining why it's widely popular among prop trading firms.
• Profit Cushion: Once you begin making profits, the distance between the static floor and the current balance will continue to increase. This will lead to a larger and more permanent cushion against any losses you may make in the future.
• Fixed Floor: Your drawdown limit will be based on the starting capital, thus ensuring a consistent risk capital.

Explore this concept in detail Daily Vs Intraday Drawdown

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Let’s look at an example of a static drawdown:

If you have a starting balance of $100,000 and an accompanying static drawdown of 10%, it means that you can’t lose more than $10,000 in your funded account.

• The account balance grows to $105,000
• After a while, it drops to $90,000
• The loss that’s allowed from the starting balance will be $100,000 - $ 90,000 = $10,000

Now, given that this amount is an exact match to your drawdown limit, it means that if you hit the $90,000 level, the funded account will have been breached. 

What Is Trailing Drawdown?

Trailing drawdown is a bit different from static drawdown. In a static drawdown, the risk level will remain the same, no matter how much the funded account grows. A trailing drawdown means the drawdown will adjust as the balance increase

The implication here is that the risk limit will only increase when the account attains new peaks. Trailing drawdowns are designed to safeguard your profits by tracking any gains made from open trades. 

One of the top advantages offered by trailing drawdowns is that it ensures you get to keep track of all gains made during your profitable sessions. When the account records a new peak, the threshold increases automatically, leading to a higher cushion.

It’s an approach that will help you avoid losing large sums after having gone on a consistent, strong run. In short, it helps guarantee that your trading discipline won’t be compromised. 

Let’s look at an example to better explain this:

If the funded account balance is $10,000 and you manage to raise it to $12,000, your trailing drawdown will continue to follow this high. And if your trading activities were to hit a rough patch after this, the risk limit will adjust to reflect this new balance. It’s an approach that makes it easier for you to protect your profits as you work on your profitability.

By being able to adapt to your performance, trading drawdowns can assist in encouraging responsible risk management with the added advantage of not placing a limit on your scalability. It’s what makes it a practical tool for any skilled trader looking to protect their profits and build consistency. 

When to Use Static and Trailing Drawdowns

The decision on which drawdown to use should always be based on your trading style and short- and long-term goals.

Pick a static drawdown if:

• You need more space to consider your trade
• You like holding trades over longer periods
• You’re accustomed to slow and careful trading
• You expect to make early profits

If this is not for you, choose trailing drawdown if:

• You prefer tight risk control
• You trade fast or prefer scalping
• You’re after quick stops and prefer trading with small targets
• You wish to lock in your targets

Dive deeper into this topic Fixed Vs Trailing Drawdown

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A Side-By-Side Static Drawdown Vs Trailing Drawdown Table Comparison

Conclusion

Understanding the differences between these two types of drawdowns helps you stay safe and profitable. A static drawdown is easy to manage if you’re able to grow your funded account from the onset. A trailing drawdown, on the other hand, helps keep you sharp and focused on every step that you take. Once you know which drawdown fits your trading style, you’ll be better positioned to trade smartly and with more confidence. At Audacity Capital, we will provide you with the resources you need to make your decision. Visit our website today to learn more about the different types of drawdowns available. 

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