What’s Maximum Trailing Drawdown and how is calculated for Classic Accounts?

This is the limit on the maximum loss a user can sustain in the lifetime value of their account in each phase. Violating this limit is a hard breach, meaning loss of account access.

The loss limit is calculated versus the maximum value of the account over time. Any increase in the account balance from the starting balance will be treated as a new high water mark for the account (HWM).

The Max drawdown limit is a “trailing” limit, meaning it is calculated versus the  high water mark which increases as the value of the account balance increases. Account balance reflects Realized P&L. HWM will not be calculated from position with unrealized Profit.  The maximum drawdown limit will trail up to the maximum of the initial balance. The HWM and max drawdown level will be maintained and not decrease if the Account Balance/Equity  decreases. 

Example 1 : How daily loss limit and max drawdown works

Day x - Over several days the user has built an unrealized profit of $5,000

• Unrealized profit/loss (P&L): $5,000
• Account Equity: $105,000
• Next day 
  • Max daily loss amount: $5,250 ($105,000 * 5%) 
  • Max daily loss equity trigger level: $99,750 ($105,000 - $5,250) 
  • Daily Profit Max Level $110,000 ($105,000 + $5,000)
  • Max drawdown limit: $90,000
    
    

Day xx - The user has generated an additional $3,000 in profit, bringing their total balance to $108,000

• Realized profit/loss (P&L): $3,000
• Account Balance is the same as Account Equity (all PL is realized): $108,000
• Next day 
  • Max daily loss amount: $5,400 ($108,000 * 5%) 
  • Max daily loss equity trigger level: $102,600 ($108,0000 - $5,400) 
  • Max drawdown limit: $98,000 ($108,000 - 10% of initial balance) 
    
    

Day xx +1 - The user makes an unrealized loss of $5,000 

• Unrealized profit/loss (P&L): $5,000
• Account Equity: $103,000
• Next day 
  • Max daily loss amount: $5,150 ($103,000 * 5%) 
  • Max daily loss equity trigger level: $97,850 ($103,0000 - $5,150) 
  • Max drawdown limit: $98,000 ($108,000 * 10% of previous day Account Balance )
    
    

Day xx +2 - The user makes an additional unrealized loss of $5,100 

BREACH

• Unrealized profit/loss (P&L): $10,100
• Account Equity: $97,900
• Next day 
  • Max daily loss amount: $5,150 ($103,000 * 5%) 
  • Max daily loss equity trigger level: $97,850 ($103,0000 - $5,150) 
  • Max drawdown limit: $98,000 ($108,000 - 10% of initial balance) 

Example 2 : How Max Drawdown trails up to the Initial balance 

Day x - Over some time, the user brings the realized P&L of the account to $120,000

• Account Balance = Account Equity (Realized P&L): $120,000 (new HWM on the account)
• Daily loss limit: $6,000 (5% of $120,000)
• Daily loss limit trigger level: $114,000 
• Max Drawdown Limit trigger level: $100,000  
  • $120,000 (HWM) - $10,000 (10% from Initial Balance= $110,000.  However, this is higher than the initial balance of $100,000 hence the Max Drawdown will be capped to the Initial balance level of $100,000.

Find more examples here