Equity drawdown
Also known as: equity-based drawdown, floating drawdown
Equity drawdown: Equity drawdown is the fall in an account's equity, its balance plus floating profit and loss on open trades, from a reference level such as the starting balance or a previous high.
Balance vs equity drawdown
Balance-based drawdown counts only closed trades. Equity drawdown also counts unrealised profit and loss on open positions, and often swaps and commissions. Many prop firms check their limits against equity, so an open trade can breach a daily drawdown or maximum drawdown limit before it is closed: prop firm drawdown rules.
Why equity drawdown matters for open trades
A stop loss limits the planned loss on a trade, but while the trade is open its floating loss already counts in equity. Gaps and slippage can take the loss beyond the stop, so equity-based limits leave less margin for error than the stop distance alone suggests.
Worked example
Illustrative only: an account has a balance of $50,000 and one open trade with a floating loss of $1,200. Equity is $48,800. A balance-based limit still sees $50,000; an equity-based limit sees $48,800 and measures drawdown from that figure.
Sources
- Trading Objectives, FTMO
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Related terms
- Daily drawdown
Daily drawdown, also called the daily loss limit, is the most an account may lose within one trading day under a prop firm's rules; the limit is recalculated at a reset time set by the firm.
- Trailing drawdown
Trailing drawdown is a maximum loss limit that rises as an account reaches new highs, staying a fixed distance below the highest balance or equity reached, and never falls.
- Drawdown
A drawdown is the decline in an account's value from a peak to a subsequent low, usually expressed as a percentage of the peak.