Fixed Vs Trailing Drawdown

Key Highlights 

A drawdown in prop trading refers to the amount by which your funded account goes down from its peak point. Here’s a quick look at fixed vs trailing drawdowns:

• Static or fixed remains the same, while trailing moves upwards
• Fixed drawdowns are best for swing trading. A trailing drawdown works well among scalpers and short-term traders.
• A fixed drawdown leaves you with more wiggle room when you’re able to make money early on. The trailing drawdowns become more difficult the more you earn. 
• Fixed drawdowns are based on your opening balance, with the trailing drawdown being based on the highest balance attained. 

Fixed vs Trailing Drawdown

In prop trading, managing drawdowns is a key aspect of becoming a profitable trader. As such, if you’re to participate in an evaluation challenge, it will be important to start by understanding the different kinds of drawdowns and their differences, e.g., fixed vs trailing drawdown.

The knowledge you gain during your research will enable you to align your trading strategy with the prop firm’s requirements. This will, in turn, make it easier to manage risk and meet the profit targets set for you.

One thing you need to understand is that each type of drawdown will require you to use a different approach with regard to your trading strategy and risk management. Read on to learn more about the fixed vs trailing drawdown limits!

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What Is Fixed Drawdown?

A fixed drawdown prop trading limit refers to a type of drawdown where the minimum balance set by the prop firm for your funded account gets to remain at a fixed value. This drawdown is applied exclusively to traders who have successfully passed the evaluation challenge. 

And once it has been applied, you’ll not be allowed to dip below the set minimum balance. Doing so will automatically lead to account termination and your departure from the funded program. 

Therefore, if you’re to succeed, you must adapt your strategy to this drawdown model. The implication for you is that:

• You now have more freedom to engage in swing trading
• It will be easier for you to build a profit cushion before making increases to your lot positions
• You’re now better placed to hold trade positions for a much longer duration 

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What Is Trailing Drawdown?

A trailing drawdown refers to a type of drawdown limit that’s based on the positive performance of your funded account. What this means is that if, for example, you were to increase your profit by $10.00, then the trailing drawdown will increase by a similar amount. 

As we have explained in our Prop Trading Challenges & Rules guide, all prop trading rules use the closed and open equity intraday. So, what type of strategy does this trailing drawdown explained guide recommend?

Read our complete guide on this topic daily vs intraday drawdown

• Track your equity peaks and dips daily.
• Try to close your profits early, particularly in the first few trading hours.
• Whenever possible, avoid leaving open positions under volatile market conditions.
• Shift your focus to smaller, more consistent gains 

Understand this better here Common Rule Violations

I’d like to point out that prop firms tend to use different drawdown models based on the kind of funded account that they’re running. 

My research shows that the reason for this is to help provide traders with better clarity and control over their actions. Having said that, this is what I have noticed so far:

Firms that have a two-step verification process prefer the static drawdown model, which ensures that all your loss limits will remain fixed at the same level. New to this concept? then check static drawdown vs trailing drawdown

Those who have the Instant Funding or one-step challenge opt to use the trailing drawdown limit that has a lock. 

It’s, thus, important to undertake extensive research on every prop firm that you’d like to trade with to make sure that you fully understand what is expected of you.

The truth is that the best prop firms are those that make their risk environments clear, allowing you to perform better. These types of funding models help reduce stress when trading. 

Read More About Understanding Prop Trading Challenges & Rules

Fixed Vs Trailing Drawdown Comparison Table

Understanding the differences between fixed and trailing drawdown is crucial for any trader looking to excel in a prop firm evaluation. As we have mentioned elsewhere in this guide, each type of drawdown will call for a different approach.

Join us below as we take a closer look at the differences between these two:

Which Model Suits Which Trader Type?

Both drawdown models will have a different impact on your trading strategy. For example, the fixed drawdown will be best suited for traders practicing long-term strategies. It’s a strategy that rewards patient traders and provides them with more flexibility.

What this means is that as the trading account continues to grow, you’ll be better placed to hold positions longer and use wider stop losses. With this, you can easily ride out any market fluctuations without having to worry about your predefined liquidation points. 

It’s what makes it best for trend and swing traders. 

The trailing drawdowns, on the other hand, will require a stricter risk management plan. Given that your buffer will remain tied to the account’s peak performance, there’ll be an urgent need to lock in profits as soon as possible. 

Dive deeper into this topic Prop Trading Risk Rules

While at it, make sure that you don’t hold on to positions for too long, as this may prove damaging to your account. 

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Common Mistakes Traders Make

While most trading mistakes are unavoidable, it’s recommended that you try to learn from every trade decision made – whether successful or not. Below is a look at some of the common mistakes made by traders:

• Failing to properly research the market: Always conduct a detailed research of each market before opening a position. Use your time to determine whether it’s an exchange or an over-the-counter market and the kind of volatility to expect.
• Over-relying on trading software: Not all software is built the same. Some provide full customization and automation, while others may require a little tinkering. Either way, try to learn the pros and cons of each before using it on your trades. 

Explore this concept in detail Daily vs Max Drawdown

Conclusion 

When it comes to the fixed vs trailing drawdown limits, you must understand that your choice will have a significant impact on the trading approach you’ll use. The static drawdown will enable you to build a growing safety net every time you hit your profit targets.

A trailing drawdown, on the other hand, will continue to increase upward, thus safeguarding your profits. Ensuring you align the drawdown model with your preferred strategy will be essential to sticking to your risk management plan, something Audacity Capital emphasizes!

Make it your goal to choose a prop firm that fits your trading style. 

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