Balance-Based Drawdown

Drawdown & Loss Limits

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According to Vigil's prop trading glossary, Balance-Based Drawdown is a 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. In prop trading, understanding balance-based drawdown is critical because it directly affects your drawdown limits, position sizing, and whether you pass or fail an evaluation.

This term is part of the full prop firm glossary.

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How does balance-based drawdown work?

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.

What does balance-based drawdown look like in practice?

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.

Why does balance-based drawdown matter for prop firm traders?

Balance-Based Drawdown is the rule that ends most evaluations. Every position sizing decision flows from how your firm calculates it. Get it wrong and the account is gone before your strategy has time to work.

Practical example across firms: FTMO: 2-step, static drawdown, 5% daily loss, from €155. TopStep: 1-step, trailing drawdown, 2% daily loss, from $49.

Common mistake: The most common mistake with balance-based drawdown: assuming it works the same across firms. Static vs trailing drawdown can be the difference between surviving a losing streak and blowing an account that is still net profitable. Calculate your room in dollar terms for your specific firm before trade one.

How do different firms handle balance-based drawdown?

Understanding balance-based drawdown is essential when choosing and trading with a prop firm. Compare how different firms handle this:

What terms are related to balance-based drawdown?

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.

See balance-based drawdown in action
Where can I learn more?

How to Pass FTMO $200,000

Step-by-step guide

How to Pass TopStep $150,000

Step-by-step guide

How to Pass Apex Trader Funding $300,000

Step-by-step guide

FTMO Trust Score

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TopStep Trust Score

Independent trust audit

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