A drawdown rule is a hard ceiling on the loss a prop firm trader can incur before the account is closed. Almost every firm enforces two flavors simultaneously: (1) a daily drawdown — typically 5% of the starting balance — measured from each trading day's opening equity, and (2) a total or max drawdown — typically 10% — measured either from the initial balance or from the highest equity ever achieved (a trailing drawdown). Breach either and the funded or challenge account is terminated immediately, with no second chances.
Daily drawdown almost always includes floating (open-trade) losses, not just realized ones. A trade that briefly dips deep into the red and recovers can still trigger a breach.
Worked example
You have a $100,000 FTMO funded account. The day starts at $102,000 equity (the previous day's close). The 5% daily drawdown is measured from $102,000, so you can lose up to $5,100 today before breach. Your total/max drawdown is 10% from the initial balance, locked at $90,000 — equity below that ends the account. If FTMO uses a trailing max drawdown that locks once equity hits $110,000, the floor would trail up to $100,000 and freeze.
Why it matters
Drawdown rules are why prop trading is mostly a risk-management exercise, not a profit-target exercise. A trader risking 1% per trade can absorb a five-loss streak before approaching daily breach; a trader risking 3% cannot. See max drawdown for the broader concept outside prop firms.
Common pitfalls
- Forgetting daily drawdown resets at the firm's server time (often 5pm ET / 22:00 UTC), not midnight local.
- Assuming "trailing" drawdown stays trailing — at FTMO the trailing 10% locks once you hit a 10% gain on the initial balance.
- Calculating drawdown from balance rather than equity. Floating losses count.
- Holding overnight positions that gap through the daily floor before you can react.