Key Highlights

Prop firms use an intraday drawdown to calculate your trailing drawdown at the funded account stage. The calculations are based on the peak balance attained by the account and will usually include both unrealized and realized gains. Its key characteristics include:

• Seasoned traders are wary of intraday trailing drawdown as it’s seen to punish normal pullbacks, and this can cause one to lose their funded trading accounts. 
• End-of-day trailing drawdown mirrors real conditions in the market, allowing you an opportunity to ride out dips.
• Many reputable prop trading firms use end-of-day drawdown, enabling traders to reach payouts, stay consistent, and scale their accounts. 
• Flashy rules won’t matter much if the accompanying rules are designed to set you up for failure. Always partner with a firm whose rules will help you grow, not constrain you. 

Intraday Trailing Drawdown

If you have ever traded with a prop before, the chances are that you understand this feeling: one minute your day is going well with your trades lining up perfectly, and the next moment, one trade begins pulling back, breaching your account. 

And the reason for this happening? It’s not because you broke your personal trading rules or deviated from your meticulously curated trading strategy, no. All this is happening because of a rule put in place by the prop firm, and which, by all accounts, probably doesn’t have much to do with real trading.

When such things happen, they help remind you why you should forget chasing the big account size, the lowest price, and even the flashy “pass your evaluation in one day” offers. The reality is that none of these offers will matter if the drawdown rules make it impossible to walk away with a profit. 

To prevent this from happening, make sure to understand drawdown rules, and most importantly, how intraday trailing drawdown works. Read on to learn more about this rule, including why many traders who don’t understand how it works end up failing their funded evaluations. 

What Is Intraday Trailing Drawdown?

The intraday trailing drawdown refers to a dynamic risk management limit where the maximum permitted loss increases in real-time in response to your new equity balance. Its calculations include your unrealized/open profits, and once it has risen, it never goes down.

Important Characteristics of Intraday Trailing Drawdown

Prop firms use an intraday drawdown to calculate your trailing drawdown. The calculations are based on the peak balance attained by the account and will usually include both unrealized and realized gains. Please note that the drawdown will continue to adjust as the account hits new highs.

Audacity's Trading Program

Check Here For Instant Funding

Audacity's Trading Program

Check Here For Instant Funding

But while this may be the case, the drawdown will stop adjusting once you have hit the opening balance.

Let me use an example to help you better understand this intraday drawdown:

During the evaluation, the prop firm sets the following limits for your funded account:

Starting Balance: $50,000

Maximum Trailing Drawdown Amount: $2,000

For us to calculate your initial equity limit, we will need to do the following:

Starting Balance – The Maximum Trailing Drawdown Amount ($50,000 – $2,000)

Now, every time your trading account records a new high, including on unrealized/open profits, your trailing drawdown threshold will be adjusted upwards:

For example:

New Equity High: $51,000

New Adjusted Drawdown Limit: $51,000 – $2,000

Using this example, if the value of your account declines even when you have an open trade, your limit will not change. But if the equity balance falls below the recently adjusted drawdown limit, the prop firm will consider you to have violated its trading rules. 

Intraday Vs End of Day Trailing Drawdown

Of all the rules used by prop trading firms to screen potential traders, the trailing drawdown is probably the rule that helps eliminate the highest number of traders. And this is not because the traders didn’t know how to trade, but because they failed to understand what was going on. 

Read on to learn the different types of trailing drawdowns and how each works.

End of Day Trailing (EOD) Drawdown 

The end-of-day trailing drawdown (EOD) is commonly referred to as the forgiving model. It works by calculating the account’s highest watermark based on the balance present in your account at the close of trading. As such, the movements (dips and peaks) that happen intraday are irrelevant to the drawdown calculation. 

Audacity Capital Empowering Traders Since 2012

Get Funded With A Trusted Prop Firm

Audacity Capital Empowering Traders Since 2012

Get Funded With A Trusted Prop Firm

Here’s an example of the EOD drawdown at work:

1. Opening Account Balance: $50,000. Assigned Drawdown Floor: $48,000
2. During trading, the account records a profit of $2,000 on one of your open trades, but it is recorded as an unrealized profit.
3. If the market reverses and the trade closes at a breakeven position, it means that your closing account balance will go back to $50,000.
4. Your drawdown floor at the close of the trading day will remain at $48,000.

The implication here is that the intraday peak of $52,000 attained during mid-session trading never happened from the drawdown’s perspective. As such, the floor would only have moved if the closing balance was higher than the opening balance.

Traders accustomed to holding positions through normal intraday variances will find the end-of-day drawdown more forgiving than the intraday drawdown. And if you don’t believe us, just compare the EOD example above with the intraday drawdown example given earlier!

Side-by-Side Table Comparison of End-of-Day and Intraday Drawdown

The table below provides a comparison of these two commonly used types of trailing drawdowns:

How Does Intraday Trailing Drawdown Work

Intraday trailing drawdown works by tracking real-time equity, including open trade positions. For traders using this type of drawdown, it means any drop in equity that falls below the trailing drawdown threshold can trigger a rule breach..

How It Works ?

1. Real Time Tracking: The drawdown limit will adjust as the open trade positions make money, and once it increases, don’t expect it to come down.
2. “Locking” at Zero: The trailing mechanism will stop moving once the drawdown level arrives at the opening account balance.
3. Triggering an Account Breach: If the equity dips below the newly arrived at drawdown levels, the prop firm will see this as a violation. 
4. Unrealized Profits and Losses Matter: Unlike the case with end-of-day drawdowns, the intraday trailing drawdown will consider all open positions, including your unrealized profits. 

Prop Trading Challenges

Free Prop Firm Trading Competition

Prop Trading Challenges

Free Prop Firm Trading Competition

Conclusion

If you’re in the process of choosing a prop trading firm or are stuck between different types of accounts providing varied options, always use the drawdown model as the primary filter. An end-of-day trailing drawdown will usually be more forgiving, thus increasing your probability of completing the funded account challenge. It’s also the most sensible for any trading style that requires you to hold a position. 

And while at it, take note that the intraday drawdown doesn’t have to be a deal breaker, especially if you can build a trading strategy around it. For example, a scalping approach can work quite well with this model. At Audacity Capital, we have made sure you have all the information you need to learn about our funding challenge. Be sure to read through the available resources to see why you should sign up with us. 

FAQ