A drawdown calculation method used by some prop firms that evaluates risk based on whichever is higher between the account balance or the account equity (balance plus any floating profit from open trades). Because of this, the drawdown level can adjust upward when open trades move into profit, even if those profits have not been realized.
Why It Matters
- 1Equity-based drawdown is stricter than balance-based drawdown because floating profits can raise your risk limit during the day. If open trades reach a high profit and then reverse, your allowed loss threshold may already have moved upward.
- 2This means traders can breach the drawdown rule even if their balance never changed or they still end the day in profit.
- 3Understanding this rule helps traders manage open positions carefully and avoid giving back large unrealized gains.
Example
- 1Imagine you start the day with a $100,000 account and a 5% maximum daily drawdown, meaning you cannot lose more than $5,000 in a day. During the day, your open trades move into profit and your equity rises to $105,000, even though your balance is still $100,000 because the trades are not closed yet. Since the prop firm considers the higher value between balance and equity, the drawdown calculation now uses $105,000 instead of $100,000. Your new stop-out level becomes: $105,000 − $5,000 = $100,000 If the market reverses and your floating profit disappears, bringing your equity back down to $100,000, you would hit the daily drawdown limit for that day even though your balance never changed.
- 2This happens because the system locked in the higher equity level when your trade was in profit.
Common Mistakes
- ✖Holding large losing positions expecting a reversal without tracking real-time equity
- ✖Not understanding that equity drawdown can trigger during intraday swings even if you close flat
- ✖Using wide stop-losses that allow equity to dip below the drawdown threshold