Equity-Based Drawdown

Drawdown & Loss Limits

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According to Vigil's prop trading glossary, Equity-Based Drawdown is 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. In prop trading, understanding equity-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 equity-based drawdown work?

Equity-based drawdown means the firm monitors your real-time account value including open positions. If you have a $5,000 floating loss and a $4,500 drawdown limit, you would breach the limit even though you have not closed the losing trade.

This method is used by FTMO for daily loss limits. It prevents traders from holding deep underwater positions hoping for a reversal. With equity-based rules, you cannot "hide" losses by keeping positions open.

The practical impact is that you need wider stop-losses or smaller position sizes compared to balance-based drawdown. A trade that temporarily goes against you by $3,000 before recovering to profit would be fine under balance-based rules but could breach an equity-based daily loss limit.

What does equity-based drawdown look like in practice?

FTMO $100K with equity-based 5% daily loss limit ($5,000): you open 2 lots of EUR/USD. The trade moves against you by 200 pips. Floating loss: $4,000. You also have a closed loss of $1,200 from earlier. Total equity-based loss: $5,200. Daily limit breached at $5,000 even though the open trade might recover.

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

Equity-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 equity-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 equity-based drawdown?

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

What terms are related to equity-based drawdown?

Balance-Based Drawdown

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.

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.

Stop-Loss

A pre-set order to close a position at a specified price to limit losses. In prop trading, stop-losses are not optional -- trading without them means a single adverse move could breach drawdown limits and terminate the account.

Risk Per Trade

The maximum dollar amount or percentage of account balance you are willing to lose on a single trade. Most prop firm traders risk 0.5-2% per trade to ensure they can withstand losing streaks without breaching drawdown limits.

See equity-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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