A drawdown is a trade on its way to losing money, except something remarkable happens, and there is a reversal of fortunes. The reason prop firms have stringent drawdown limits is straightforward. You will likely fail the evaluations if your trades have high drawdowns. A high drawdown level puts the account capital at risk. Drawdowns tend to be measured in percentages of the account capital, and ideally, a good trading strategy should have a low drawdown level.It is only when the position is closed out in negative territory that a drawdown is converted into a loss. A drawdown is a scenario where an active trade position heads into negative territory and puts the position in a loss, even though this loss is unrealized.They can mean the same thing when used within the context of the evaluations for funded trader programs. You may have seen the terms “drawdown” and “loss” used interchangeably. % drawdown = (loss/initial capital) X 100%Īssuming you have a $10,000 account and lose $1,000, or a trade position goes negative by $1,000, the % drawdown here = (1000/10000) X 100 = 10%. Extremely volatile market conditions that produce slippage.The drawdown is defined as the percentage reduction of your account capital due to trading losses.
This article will explain the drawdown and also show you how the drawdown works on the TrueForexFunds evaluation programs. You may also call this the 5% maximum daily and 10% maximum total loss rules.
The trade objectives covering the drawdowns state that you must lose at most 5% of your capital daily or 10% of your capital. One of the trade objectives has to do with the daily and overall drawdown. Whenever you sign up for the 2-step evaluation on TrueForexFunds, you are provided with a set of trade objectives you must achieve to move on to the next stage. They also want to know if you can avoid breaking the rules regarding how much you can lose within a particular time frame. They want to know if they can entrust their money into your care and that you can responsibly grow their capital.
The prop firms also want to see that you obey the principles of risk management and that you can follow the rules. Participating in a funded trader program is about more than just making and splitting profits.
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