End of day Trailing Drawdown

Key Highlights

Prop firms that provide an end-of-day trailing drawdown will only make changes to the maximum stop loss level after the markets have closed and after the balance has increased. In a nutshell, this is what to expect from the end-of-day trailing drawdown:

• The end-of-day trailing drawdown will only increase when the value of your trading account is higher than the value it had when you started trading. 
• Intraday trading is more restrictive, while the end-of-day trading allows you to ride through any swings that occur during the day’s trading. 

End of day Trailing Drawdown

A drawdown refers to a reduction in the balance of a funded trading account from the highest recorded peak. Prop firms typically express drawdowns as a percentage, although some firms define them as fixed dollar amounts.

Every type of prop trading account that you come across will have its own drawdown level that has been designed to help you manage risk and withstand potential bear runs. Of this an end-of-day drawdown is a type of drawdown that updates after the trading day closes. 

Read on to learn more about the end-of-day trailing drawdown!

What Is End-of-Day Trailing Drawdown

Prop firms that provide an end-of-day trailing drawdown will only make changes to the maximum stop loss level after the markets have closed and after the balance has increased. 

Having had the opportunity to work with firms that have this type of drawdown, I’d like to point out that the drawdown level will only rise once the value of your trading account has increased. 

And this refers to the value recorded at the end of closing activities, and not any other increases that may have happened during the day. 

Based on my experience with it, I can confidently state that the end-of-day drawdown is by far the best kind of drawdown that a trader can use. 

Below is an example of how it can affect your maximum stop loss level limit:

Your funded account balance at the start of the trading session is $50,000. The account then comes with a drawdown limit pegged at $2,000, thereby limiting the maximum stop loss level at $48,000.

Now, keeping this in mind, you begin trading and are lucky to record some profits that see the account record a new high of $51,500. Please note that this new high is noted as an unrealized profit.

As the trading session progresses, the balance drops by $500, leaving the closing balance at $51,000. When calculating the maximum trailing drawdown for this account, the prop firm will do the following:

$51,000 – $2,000=$49,000.

If the balance increases to $55,000 on the second day of intraday trading activities before closing the day with a balance of $52,500, the prop firm will set your new drawdown limit at $50,000.

At this juncture, I know you’re probably asking why stop at $50,000 and not $50,500. The reason for this is that the drawdown limit will not typically rise above the initial account balance. 

And if you remember correctly, our starting balance in this example was $50,000. However, I recommend that you check the terms linked to each account, as this may vary from firm to firm. 

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What do I mean by this? There are instances where the prop trading firm may move the drawdown level to the opening balance + $100. While this may not be a big deal, it helps to know about it, so that it doesn’t catch you by surprise. 

End of Day Drawdown Vs Trailing Drawdown

An end-of-day drawdown will typically calculate the maximum loss based on the balances available in your trading account at the close of official trading hours. These types of calculations help provide additional flexibility to traders who like to ride out market dips and peaks. 

The trailing drawdown, on the other hand, will update on a real-time basis and is dependent on the highest realized equity. These real-time calculations are what make it restrictive, as the profits will be locked in immediately they’re made. 

Table Comparison of End-of-Day Drawdown and Trailing Drawdown

Let’s imagine a scenario where you have a $50,000 trading account and a $2,000 drawdown limit. As you go about your trading activities, the account makes a profit of $1,000 on the open trade positions, before going on a reversal that leads to it losing $500.

Trailing Drawdown: Your highest account balance on this day was $51,000, which will cause the drawdown to rise to $49,000.

End of Day Drawdown: If your trading day ends with a loss of $500, it means that your new account balance will be $49,500. The prop firm will recalculate the drawdown based on this new balance, as opposed to the peak of $51,000 recorded during the day.

Intraday Vs End Of Day Trailing Drawdown

The intraday drawdown measures the largest peak-to-trough decline in the trading balance of a funded account within a day’s trading activities. Prop firms using this drawdown rule will consider the account balance changes and price movements happening during the normal trading hours. 

Table Comparison of Intraday and End-of-Day Trailing Drawdown

In intraday trading, if the account balance rises to $103,000, the drawdown limit will lock onto this new balance, even if the closing balance drops to $100,000. For an end-of-day drawdown, the limit will only change if the closing balance changes. 

Conclusion

The end-of-day drawdown will either shift upwards or remain at the same position it started at. Another important point to remember is that once the drawdown limit has risen, it can never go down. The drawdown limit works the same way in both evaluation and Live accounts, and a breach of this level will lead to immediate account closure. At Audacity Capital, our team has provided you with the tools and resources needed to trade and remain consistently profitable. Visit our page to learn more about our funded evaluation challenges. 

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