How do I calculate the New Maximum Drawdown Limit when requesting a payout?

To determine the breach level of the maximum drawdown limit:

Step 1 - Calculate the New Max Drawdown Level

Step 2 - Compare the New Max Drawdown Level to the initial balance

If the value is more or equal to the starting balance, the Maximum Drawdown level remains at the starting balance.

If the value is less than the starting balance, that value becomes the new Maximum Drawdown level.

Formula:

New Maximum Drawdown (Max DD) Level = HWM Balance - Payouts requested - 10% of the initial balance

The High Water Mark (HWM) Balance is the highest point of the account balance.

Assume a 100k account, initial Max Drawdown Level = $90k (10% Maximum Drawdown Limit)

Scenario A - Request for payout when the account is at its HWM level

New Max Drawdown Level = 105 - 2k - 10k = 93k

Distance between Balance after payout and New Max Drawdown = $103k - $93k = $10k buffer

Scenario B - Request for payout when the account is below its HWM level

Realized Profit on the Account = $5k
HWM Balance = $105k
Balance on the Account = $105k
Maximum Drawdown = $95k (Trailing: HWM Balance - 10% from initial balance)
Realized Loss from trading after reaching HWM Balance = $2k
Balance on the account after realized loss from trading = $103k (HWM Balance is still @ $105k)
Request Payout = $3k
Balance after payout = $100k

New Max Drawdown Level = 105 - 3k - 10k = 92k

Distance between Balance after payout and New Max Drawdown = $100k - $92k = $8k buffer

Scenario C - Request for payout when the account is below its HWM level

Realized Profit on the account = $30k
HWM Balance = $130k
Balance on the Account = $130k
Maximum Drawdown = $100k (Stop Trailing - The maximum drawdown limit will trail up to the maximum of the initial balance.)
Realized Loss from trading after reaching HWM Balance = $5k
Balance on the account after realized loss from trading = $125k (HWM Balance is still @ $130k)
Request Payout = $5k
Balance after payout = $120k

New Max Drawdown Level = 130k - 5k - 10k = 115k > Initial Balance = Max DD remain at 100k

Distance between Balance after payout and New Max Drawdown = $120k - $100k = $20k buffer

Scenario D - Request for payout when the account is below its HWM level

Realized Profit on the Account= $30k
HWM Balance = $130k
Balance on the account = $130k
Maximum Drawdown = $100k (Stop Trailing - The maximum drawdown limit will trail up to the maximum of the initial balance.)
Realized Loss from trading after reaching HWM Balance = $20k
Balance on the account after realized loss from trading = $110k (HWM Balance is still @ $130k)
Request Payout = $5k
Balance after payout = $105k

New Max Drawdown Level = 130 - 5k - 10k = 115K > Initial Balance = Max DD remain at 100k

Distance between Balance after payout and New Max Drawdown = $105k - $100k = $5k buffer

Scenario E - Request for payout when the account is below its HWM level

Realized Profit on the Account = $30k
HWM Balance = $130k
Balance on the Account = $130k
Maximum Drawdown = $100k (Stop Trailing - The maximum drawdown limit will trail up to the maximum of the initial balance.)
Realized Loss from trading after reaching HWM Balance = $25k
Balance on the account after realized loss from trading = $105k (HWM Balance is still @ $130k)
Request Payout = $5k
Balance after payout = $100k

New Max Drawdown Level = 130 - 5k - 10k = 115K > Initial Balance = Max DD remain at 100k

Distance between Balance after payout and New Max Drawdown = $100k - $100k = $0k buffer Potential Breach upon opening a new trade

Reference

How Max daily loss limit works (Unrealized P&L)