Daily Drawdown Mechanism
The Daily Drawdown mechanism is designed to limit traders from losing more than 3% of their account equity or balance in a single day. The daily drawdown is calculated based on the higher value of the account's equity or balance at the end of the previous day. This rule ensures disciplined risk management and protects accounts from significant daily losses.
Key Features
Equity vs. Balance:
At the end of each trading day, the system calculates the daily drawdown based on the higher of the account's equity or balance.Daily Drawdown Calculation:
The daily loss limit is set at 3% of the higher value between the account's equity or balance at the end of the previous day.
Disqualification:
If a trader's losses within a single day exceed the 3% daily drawdown limit, the account is breached, and the trader is disqualified.
Examples
Example 1: $25,000 Account (3% Daily Drawdown)
Scenario 1:
Starting Balance: $25,000
End-of-Day Equity: $26,000 (due to unrealized profit)
End-of-Day Balance: $25,000
Since the equity ($26,000) is higher, the daily drawdown is calculated based on equity:
Daily Drawdown (3%): 3% of $26,000 = $780
Next Day’s Maximum Loss: The trader can lose up to $780 before breaching the account the next day.
Scenario 2:
Starting Balance: $25,000
End-of-Day Equity: $24,000 (due to a losing trade)
End-of-Day Balance: $24,000
Since the equity and balance are the same, the daily drawdown is calculated based on the balance ($24,000):
Daily Drawdown (3%): 3% of $24,000 = $720
Next Day’s Maximum Loss: The trader can lose up to $720 before breaching the account the next day.
Example 2: $50,000 Account (3% Daily Drawdown)
Scenario 1:
Starting Balance: $50,000
End-of-Day Equity: $52,000 (due to unrealized profit)
End-of-Day Balance: $50,000
Since the equity ($52,000) is higher, the daily drawdown is calculated based on equity:
Daily Drawdown (3%): 3% of $52,000 = $1,560
Next Day’s Maximum Loss: The trader can lose up to $1,560 before breaching the account the next day.
Scenario 2:
Starting Balance: $50,000
End-of-Day Equity: $48,000 (due to unrealized losses)
End-of-Day Balance: $49,000
Since the balance ($49,000) is higher, the daily drawdown is calculated based on the balance:
Daily Drawdown (3%): 3% of $49,000 = $1,470
Next Day’s Maximum Loss: The trader can lose up to $1,470 before breaching the account the next day.