Balance-Based Drawdown
Drawdown & Loss LimitsA drawdown calculation method that only considers closed trade results, ignoring unrealized profits and losses from open positions. Your balance only changes when trades are closed.
Balance-based drawdown is more forgiving for traders who use wider stops or swing trade. Since only closed trades count, a position can be deeply negative without triggering a drawdown violation as long as you do not close it.
TopStep and Apex use balance-based daily loss limits. This gives traders more breathing room for intraday fluctuations. However, the overall max drawdown is typically still equity-based or has additional rules.
The distinction between equity-based and balance-based is most important for the daily loss limit. A trader with a balance-based daily limit can hold a losing trade overnight (if the firm allows overnight holding) and let it recover the next day without counting against the previous day's loss. This is not possible with equity-based limits.
TopStep $100K with balance-based 2% daily loss limit ($2,000): you open a trade that drops $3,000 in floating loss. Balance-based limit is not breached because the trade is still open. You close a different trade for a $1,500 loss. Balance-based daily loss: $1,500 (under the $2,000 limit). If this were equity-based, total loss would be $4,500 -- immediately breached.
Balance-Based Drawdown directly affects whether you pass or fail a prop firm evaluation. Unlike trading your own account where you can recover from mistakes over time, prop firm rules create hard boundaries -- violate them once and you lose your challenge fee and have to start over. Drawdown rules are the number one reason traders fail prop firm evaluations. Understanding exactly how balance-based drawdown works at your chosen firm is not optional -- it is the foundation of every position sizing decision you make.
Practical example across firms: FTMO and TopStep handle this differently. FTMO is a 2-step firm with static drawdown and a 5% daily loss limit, starting from €155. TopStep is a 1-step firm with trailing drawdown and a 2% daily loss limit, starting from $49. These structural differences mean your approach to balance-based drawdown must adapt to whichever firm you choose.
Common mistake: Traders often assume all drawdown rules work the same way. They do not. The difference between static and trailing drawdown can mean the difference between surviving a losing streak and losing your account while still net profitable. Before starting any evaluation, calculate exactly how much room you have in dollar terms, not just percentages.
Equity-Based Drawdown
A drawdown calculation method that includes unrealized (open) trade profits and losses in the account value. Your equity fluctuates with every tick while positions are open, making this stricter than balance-based drawdown.
Daily Loss Limit
The maximum amount you can lose in a single trading day before your account is flagged or terminated. This resets each day and is separate from your overall maximum drawdown.
Drawdown Floor
The minimum account balance or equity level before a prop firm terminates the account. If your balance or equity touches this level, the account is immediately closed and the evaluation or funded status is lost.
Overnight Holding
Keeping trading positions open past the daily market close. Some prop firms require all positions to be flat (closed) before the end of the trading session, while others allow positions to be held overnight.