The high-water mark is the highest equity level an account has reached. In prop trading, it is used to calculate trailing drawdown. When the account reaches a new equity high, the drawdown limit moves up to match it. If equity decreases, the high-water mark does not move down.
Why It Matters
- 1The high-water mark is the reference point for trailing drawdown calculations.
- 2Every new equity high raises your high-water mark and simultaneously raises your drawdown floor, reducing your available buffer.
- 3This creates a paradox where being very profitable early in an evaluation can actually make it harder to pass, because your safety margin shrinks while the profit target may already be met. Understanding this dynamic is essential for managing risk in trailing drawdown accounts.
Example
- 1Your $100,000 account has a 6% trailing drawdown.
- 2Day 1: equity peaks at $102,000, high-water mark is $102,000, drawdown floor is $95,880. Day 5: equity peaks at $107,000, high-water mark rises to $107,000, drawdown floor rises to $100,580. Even though you're $7,000 in profit, your available drawdown is only $6,420. If your equity dips from $107,000 to $100,580, the account is terminated despite being profitable overall.
Common Mistakes
- ✖Not tracking the high-water mark in real-time, especially on intraday trailing drawdown accounts
- ✖Celebrating big winning days without realizing the high-water mark just made the account more
- ✖Assuming the high-water mark resets between evaluation phases — it depends on the firm