When evaluating prop firms, the profit target is only half the equation. The drawdown rules are where firms actually make their money, and understanding the difference between Trailing and Static drawdown is critical.
Static (Absolute) Drawdown
A static drawdown is calculated based on your initial starting balance. If you start with a $100,000 account and have a 10% static maximum drawdown, your account equity cannot drop below $90,000. It doesn’t matter if your balance grows to $120,000; your absolute failure threshold remains locked at $90,000.
This is the most trader-friendly drawdown type.
Trailing Drawdown (EOD vs. HWM)
Trailing drawdowns move up as your account balance grows. There are two types:
- End of Day (EOD) Trailing: The drawdown limit adjusts at the end of the trading day based on your closing balance.
- High-Water Mark (HWM) / Real-Time Trailing: The drawdown limit adjusts continuously based on your highest floating equity.
The Danger of HWM: If you are up $5,000 in floating profit, but close the trade for only a $1,000 profit, your HWM trailing drawdown still moved up as if you secured the $5,000. This “unrealized” profit can drag your drawdown limit up and cause you to breach the rule even while your account is in profit.
Always read the fine print. We explicitly highlight drawdown types in our Prop Firm Reviews.