Comparing Daily And Intraday Drawdown In Prop Trading Firms

Key Highlights

Drawdowns are a common feature in prop-funded trader programs as they help in defining acceptable risk. In this regard, there are two approaches that are among the most commonly discussed:

• Day/End of Day Drawdown: It refers to a risk boundary that gets evaluated once the trading session has ended. 
• Intraday Drawdown: It’s a common metric used by prop trading firms and is one that increases with the account’s highest peak balance. 

Comparing Daily and Intraday Drawdown In Prop Trading Firms

Drawdown rules help define the boundaries of every prop-funded trading account. These rules dictate how much you can afford to lose before getting disqualified. For a prop trader, the kind of drawdown in use by a firm will affect your approach to position sizing and risk and volatility management. 

In this guide, you’ll learn what daily and intraday trading are, the key differences between them, and get answers to the frequently asked questions on this subject matter. Read on to learn more!

Daily Drawdown: What Is It and Why Does It Matter?

A daily drawdown in prop trading refers to the maximum peak-to-trough decline experienced in the value of a funded account during a single day’s trading activities. It assists in measuring the total value lost by the account from its highest point to its lowest within one day. 

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Why It Matters

• The daily drawdown indicates the level of risk exposure in a funded trading account within a single day of trading.
• Many prop trading firms have put in place strict rules regarding the management of daily drawdowns to help protect the firm’s capital. 

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The Different Types of Daily Drawdowns

Before we can start comparing daily and intraday drawdown in prop trading firms, it will be important to first get an understanding of what each means:

1. Intraday Drawdown

The intraday drawdown helps track your real-time equity, including that held up in open trades. Please note that if the account equity were to drop below the stated limit even for a few seconds, the prop firm will see this as a rule violation.

At this point, I think it’s important to point out that this type of drawdown considers the account value and price movement changes that take place during the normal trading hours. 

Experience has taught me that prop firms mainly use the intraday drawdown to help them understand the extent and nature of losses that you have incurred. 

Using this information, the prop trading firm will now be in a position to assess the risk posed to the account and the underlying volatility of your positions. 

Let me use a real-world example to explain this:

Opening balance: $50,000

Intraday drawdown: $2,500

In this example, if the account equity were to drop below $47,300 during an open trade session, the prop firm will view this as a rule breach. And this position will remain even if you’re fortunate enough to recover the balance later. 

Pros of intraday drawdown

• It reduces your likelihood of using the firm’s capital to engage in risky trading activities.
• It helps build strong discipline, as you need to respect risk to remain funded.

2. End of Day/ Daily Drawdown

Prop trading firms calculate the end-of-day drawdown based on the balance available in your account at the end of a trading day. If you look at the daily vs intraday drawdown prop trading firms' differences, you’ll note that this is the key difference.

In this type of drawdown, the open trade fluctuations happening in your funded account during the day don’t matter. They’ll only matter if they become realized at the end of the day.

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Let’s look at a real-world example:

Opening balance: $50,000

Maximum end-of-day drawdown: $2,500

Closing balance after sustaining losses: $48,000

If you look at the example above, you’ll notice that despite incurring a loss during the day’s trading, the account balance didn’t dip below $47,500. As a result, this means that the trade is still within the rules.

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Pros end-of-day drawdown

• Less stressful than intraday trading, as any temporary price fluctuations happening in the account don’t lead to any violations.
• It leaves you with enough room to execute your trading strategies. 

Dive deeper into this topic Daily vs Max Drawdown

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Comparing Daily and Intraday Drawdown in Prop Trading Firms: Table Comparison

An end-of-day drawdown uses the closing balance to calculate the account’s risk, thus allowing for higher volatility. Using it, traders don’t have to worry about incurring temporary losses, as this will not lead to a violation of the trading rules. On the other hand, the intraday drawdown monitors all fluctuations in real-time, and will immediately reduce the permitted loss limit the moment your profits increase. These real-time monitoring activities are what make it stressful for traders. 

Dive deeper into this topic static drawdown vs trailing drawdown

Below is a side-by-side comparison to help you better understand the two:

Let’s look at a trading scenario based on the differences outlined in this table:

Trader A (uses end-of-day drawdown rule): During the day, the trader sees their equity fall to $47,300 during the day’s trading activities, but manages to close with a balance of $48,200. The result: SAFE

Trader B (uses the intraday drawdown rule): As they’re trading, their account incurs losses that see them breach the $47,300 mark. The result: Account Closed.

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Tips to Help You Trade Within the Drawdown Rules 

Trading within the drawdown rules requires good position sizing, stop loss placement, and emotional control. Here’s a brief breakdown of how to stay within these rules:

• Size conservatively: Knowing how to size your positions will ensure you don’t max out your contracts when the volatility becomes too high.
• Avoid revenge trading: Emotional trading comes about after incurring consecutive losses. Knowing when to walk away will help you safeguard your capital and allow you the chance to trade another day.
• Respect cushion: Make it your goal to build up your equity to ensure that it has risen above the starting balance before you can think of scaling up.
• Use stops: Proper stop loss placements are needed to prevent your trades from breaching the drawdown limits. 
• Check trailing behavior: There are rules that will trail with the available equity until the account returns to its initial balance. 

Read our complete guide on this topic Fixed vs Trailing Drawdown

Conclusion

Drawdown rules in prop trading are designed to balance opportunity and control. The intraday drawdown rules focus on the price fluctuations happening within a single trading day. Conversely, the end-of-day drawdown rules place emphasis on the account’s overall performance from the moment the markets opened to when they closed. These two measures help provide valuable insights into market volatility and the potential losses that may be incurred by an account during varied timeframes. At Audacity Capital, we have tools and resources that will enable you to understand the differences between the two, allowing you to grow responsibly and to avoid getting terminated for rule violations. 

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