Understanding the rules

Understanding the rules can sometimes be tricky. Here are a few examples to help clarify things for you.

1. How Max daily loss limit works (Unrealized P&L) 
2. How max daily loss limit works (Realized P&L) 
3. How Max daily loss limit works (Unrealized Profit)
4. How max draw down limit works 
5. How Daily Max Profit Limit works (Consistency Rule) - Only for Challenge Phase
6. How daily loss limit and max drawdown works
7. How Max Drawdown is adjusted after payouts
8. How Max Drawdown is adjusted after new high water mark is achieved

Day 1 - User opens a position and ends the day with -$3,000 as unrealized P&L 

• Unrealized profit/loss (P&L): -$3,000
• Equity at End of Day: $97,000 ($100,000 - $3,000)
• Next day 
  • Max daily loss amount: $4,850 ($97,000 * 5%) 
  • Max daily loss equity trigger level: $92,150 ($97,000 - $4,850) 

Day 2 - The unrealized P&L continues to grow and reach a total of $7,900

BREACH

• Equity Start of day 2: $97,000
• Day 2 Unrealized P&L: -$4,900
• Total unrealized profit/loss (P&L): $3,000+ $4,900 = $7,900
• Equity: $92,100 ($100,000 - $7,900)
• Limit is breached when equity falls below the Daily Loss Limit Trigger level of $92,150

 

Day 1 - The user opens and closes a position, and ends the day with -$3,000 realized P&L

• Profit/loss (P&L): -$3,000
• Equity: $97,000 ($100,000 - $3,000)
• Next day 
  • Max daily loss amount: $4,850 ($97,000 * 5%) 
  • Max daily loss equity trigger level: $92,150 ($97,000 - $4,850) 
    
    

Day 2 - The unrealized P&L continues to grow and reach a total of -$4,900

BREACH

• Unrealized profit/loss (P&L): - $4,900 
• Equity: $92,1000 ($97,000 - $4,900)
• Daily loss limit calculated amount: $4,850 (5% x $97,000 of  previous day Equity) 
• Daily Loss Limit trigger level: $92,150 ($97,000 - $4,850)
  
  
  
  

The Trader opens positions and ends Day 1 with unrealized (running) profit of +$8,000. The Trader is not realizing (closing) any of the open positions at the end of the day. 

• Unrealized profit/loss (P&L): +$8,000
• Equity at End of Day: +$108,000 ($100,000 + $8,000)
• End of Day Balance: $100,000 (the Trader did not close and realized any positions, hence the Balance of the account was not updated)
• HWM (High Watermark) tracking Balance:  $100,000 (since there were no closed trades and profit realized on the account the HWM tracking balance stays unchanged)
  
  Next day 
  • Max daily loss amount: $5,400 (5% * $108,000 (previous EoD Equity)
  • Max daily loss equity trigger level: $102,600 ($108,000 - $5,400, or 95% of $108,000 (previous End of Day Equity)
  • The Max DrawDown: $90,000 stays unchanged, since there is no new HWM Balance  

The Trader continued to trade the next day, however the market goes against him and the unrealized profit shrinks down to $2,800 (decreased with $5,200 for the day, but still within the allowed max daily loss of $5,400) 

• The daily swing as running loss of $5,200 decreasing unrealized PL to +$2,800 
• Equity at End of Day: +$102,800 ($100,000 +$8000 -$5,200)
• End of Day Balance: $100,000 (there were no closed positions, hence the Balance did not change)
• HWM (High Watermark) tracking Balance:  $100,000 (again stays unchanged)
  
  Next day 
  • Max daily loss amount: $5,140 (5% * $102,800 (previous EoD Equity)
  • Max daily loss equity trigger level: $97,660 ($102,800 - $5,140), or 95% of $102,800 (previous End of Day Equity)
  • The Max DrawDown: $90,000 stays unchanged, since there is no new HWM 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: $6,000 (5% of $120,000)
• Daily loss limit trigger level: $114,000 
• Max Drawdown Limit trigger level: $100,000
  • (Max drawdown trails up to the maximum of the initial balance)
  • $120,000 (HWM balance) - $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 

Day X+1 - User register’s unrealized loss becomes -$5,000

NOT BREACHED

• Realized P&L: -$5,000
• Equity: $115,000 (Above daily loss limit trigger of $114,000)
  
  
  
  
  

 

Day 1 - The user’s unrealized P&L grows to $5,000 in one day, reaching the max daily profit limit 

• Unrealized P&L: $5,000
• Account Equity: $105,000
•  Daily Profit Max Level of $105,000 is reached.  All positions on the account are closed and P&L is realized. Trading is paused until the next day
• Next day 
  • Max daily loss amount: $5,250 ($105,000 * 5%) 
  • Max daily loss equity trigger level: $99,750 ($105,000 - $5,250) 

• • Max drawdown limit: $95,000 ($105,000 (HWM Balance) - $10,000 (10%  from the Initial balance) 

Day 2 -  Trading resumes at start of the day and the user’s accumulates unrealized loss of $3,000 

• Unrealized P&L: -$3,000
• Account Equity: $102,000
• Next day 
  • Max daily loss amount: $5,100 ($102,000 * 5%) 
  • Max daily loss equity trigger level: $96,900 ($102,000 - $5,100) 
  • Daily Profit Max Level $107,000 ($102,000 + $5,000)
  • Max drawdown limit: $95,000 ($105,000 (HWM Balance) - $10,000 (10% from the Initial balance) 

Day 3 -  The user’s positions swing back to a profit to a cumulative unrealized profit of $5,000 reaching again the max profit level. All positions are closed and the P&L is realized on the account.

• Unrealized P&L: $5,000 -> closed and converted to realized P&L
• Account Equity = Account Balance: $107,000 (new HWM balance)
• Next day 
  • Max daily loss amount: $5,350 ($107,000 * 5%) 
  • Max daily loss equity trigger level: $101,650 ($107,000 - $5,350) 
  • Daily Profit Max Level $112,000 ($107,000 + $5,000)
  • Max drawdown limit: $97,000 ($107,000(HWM Balance) - $10,000 (10% from the Initial balance)

Day 4 - The user opens new positions where unrealized profit of $1,000 is generated. This is enough to achieve the profit target of 8% overall profit target and to advance to Phase 2 of the Challenge.

• Unrealized P&L: $1,000
• Account Equity: $108,000

 

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) 
  • Max drawdown limit: $90,000 (there is no new HWM Balance since P&L is unrealized: $100,000 (Initial balance/HWM) - $10,000 (10% from the initial balance) 

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 (new HWM balance)
• 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 (HWM Balance) - $10,000 (10% from the 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 (No change of the max drawdown level since there is no new HWM 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

 

Day x - The user’s balance grows to $260,000 over time. 

• Account Equity: $260,000 (HWM Balance)
• Next day 
  • Max daily loss amount: $13,000 ($260,000 * 5%) 
  • Max daily loss equity trigger level: $247,000 ($260,000 - $13,000)
  • Max drawdown limit: $235,000  ($260,000 (HWM Balance) - $25,000 (10% from the Initial balance) 

Day xx - The user requests a payout of $10,000

• Payout: $10,000
• Balance after payout: $250,000 (This will be tracked as new HWM of the account)
• Next day 
  • Max daily loss amount: $12,500 ($250,000 * 5%) 
  • Max daily loss equity trigger level: $237,500 ($250,000 - $12,500)
  • Max drawdown limit: $225,000 ($260,000 (HWM Balance) - $10,000 (Payout) - $25,000 (10% from the initial balance)
    
    New Balance to be tracked daily high water mark is back at $250,000

 

Day x - The user’s balance grows to $280,000 over time. The trader continue to trade and realize a loss of $13,000 on the account.

• Realized P&L:  $30,000
• Account Equity = Account Balance (realized P&L): $280,000 (HWM Balance)
• Daily loss limit trigger level: $266,000 
• Drawdown limit: $250,000(Max drawdown trailing will stop when this has reach the initial balance of the account which is $250,000 in this case) 
  
  

Day x+1 - The user realizes a loss of $13,000

• Realized P&L: -$13,000
• Account Equity: $267,000
• Daily loss limit: $13,350 (5% of $267,000)
• Daily loss limit trigger level: $253,650
• Drawdown limit: $250,000 
  
  • Max drawdown trailing will not trail down as the balance still exceeds the initial account balance
  • $280,000(HWM balance) - $25,000 (10% of initial balance) = $255,000 

Day x+2 - User requests a payout of $17,000

• Payout: $17,000
• Account Equity: $250,000 (to be tracked as new HWM balance) 
• Daily loss limit: $12,500 (5% of $250,000)
• Daily loss limit trigger level: $237,500
• Drawdown limit: $238,000 ($280,000 (HWM Balance) - $17,000 (Payout) - $25,000 (10% initial balance) = $280,000 - $17,000 - $25,000 = $238,000 )