Trailing drawdown, explained with the arithmetic (and a tracker to check your floor)

Most traders who fail an evaluation or lose a funded account do not blow up on one trade. They misjudge the floor. The drawdown rule looks simple on the firm's page and then quietly changes the number you must stay above every time you have a good day. This is the arithmetic, worked on one set of numbers, so you can see the difference between the three kinds of drawdown and check your own account the same way.

The three rules

• Static drawdown. The floor is fixed: starting balance minus the maximum drawdown. On a $50,000 account with a $2,000 limit the floor is $48,000 and stays there whatever you make.
• Trailing drawdown, end of day. The floor is the highest end-of-day balance you have reached minus the limit. It moves up when you close a day at a new high; it never moves down.
• Trailing drawdown, intraday. The same, but the high-water mark is updated from your open equity during the session, so a trade that peaks at +$800 and closes at +$100 still lifts the floor by $800.

Some firms stop the trail once the floor reaches a set level (often the starting balance plus a buffer); some keep trailing until payout; some switch rules between the evaluation and the funded account. Those details are in your firm's own documents and they change; the arithmetic below does not.

Ten days, one account, three floors

Start with $50,000, a $2,000 maximum drawdown, and these daily results. The static floor is fixed at $48,000. The trailing (end-of-day) floor is the running high-water mark minus $2,000. "Cushion" is how far the balance sits above the trailing floor at the close.

By day 9 the account is up $1,870 and the trailing floor has risen to $49,870. The static trader still has the whole $2,000 of room; the trailing trader has only the cushion shown in the last column, and after day 10's $620 loss that cushion is $1,380. Same P&L, same account size, two very different distances from failure.

Intraday trailing is harsher again: if day 8 had peaked at +$900 before closing at +$450, the high-water mark would be $450 higher than the table shows and every floor after it $450 higher too.

Count your cushion in losing days, not dollars

A $1,000 cushion sounds like plenty until you divide it by your average losing day. In the table above the losing days average $360, so the $1,380 left after day 10 is about 3.8 average losing days of room. That is the number to put on the desk: not "I have $X", but "I can have N bad days in a row before this account is gone". When N drops below three, the right trade size is smaller than yesterday's, whatever the setup looks like.

What to do with this

1. Write down which of the three rules your account uses, and whether the trail stops at a set level. If you are not sure, you are trading a rule you cannot see.
2. Each day, before the open, compute the floor and the cushion in losing days. The free pre-trade checklist and daily risk card has the two blanks for it.
3. Size the first trade from the cushion, not from the target. The position size calculator turns a dollar risk into contracts for the common futures.
4. If you would rather type the day's close and read the floor, the drawdown and payout tracker keeps the high-water mark, the floor under all three rules, the cushion in dollars and in losing days, the daily-limit check and the payout eligibility on one sheet.

By Addison Lopez, Workshop Media Co. The example figures above are arithmetic on invented daily results; nothing here is advice about any particular firm's rules, which you should take from that firm's current documents.