A drawdown calculation method that considers only realized profits and losses. It ignores any floating (unrealized) profits or losses from open trades. In a balance-based drawdown model, your daily loss limit is anchored strictly to your starting account balance at the beginning of each day (e.g., $100,000), creating a fixed "floor" (e.g., $95,000) that does not move regardless of how much floating profit you accumulate during your trades. This system allows you to use realized profits as an extra safety buffer, ensuring that your account is only breached if your equity drops below that pre-set starting floor, rather than being penalized by the "trailing" peaks of your open positions.
Why It Matters
- 1Balance-based drawdown gives traders more breathing room because temporary unrealized losses don't trigger drawdown violations.
- 2This is particularly important for swing traders and position traders who may hold trades through significant price fluctuations before reaching their target.
Example
- 1Imagine you start the trading day with a $100,000 balance and a 5% ($5,000) daily loss limit, setting your fixed floor at $95,000. During the London session, you open a trade that rises into a $4,000 floating profit, bringing your equity to $104,000. Under the balance-based model, your daily loss limit stays anchored at $95,000. If that trade reverses and turns into a $2,000 loss, your equity drops to $98,000, which is still above your $95,000 floor.
- 2You remain in the game because the system only considers your starting balance and ignores temporary peaks in equity.
Common Mistakes
- ✖Assuming balance-based drawdown means you can hold unlimited unrealized losses — you can still hit margin
- ✖Not confirming with the firm exactly when balance is calculated (trade close vs. end of day)
- ✖Confusing balance-based drawdown with static drawdown — they refer to different concepts