More accounts funded by any funded trader are lost because of a breach of a drawdown limit than because of an analysis failure or a bad market call. The principle looks straightforward, meaning you shouldn't lose a lot. However, the measurement of the amount of money that you have lost changes everything. A static drawdown limit does not move, being static, while a trailing drawdown limit moves up with your profitability, and this may cause a loss of an account even at cases when you still have money on your account. Here, let's discuss the specifics of both types of drawdown limits from the point of view of functionality to show how you can read your buffer beforehand.
People think some kind of a catastrophe happens, which leads to losing the funded account. The fact is that such losses happen in a quiet way: they obtain a good profit, lose something out of it in the course of the following trades, and then they lose their account, because at a certain point they do not monitor their equity changes anymore. You lose your account not because you act recklessly, but because you do not know exactly where you have set the limit.
The limit is a drawdown limit — the limit amount of money that your account is allowed to lose before the evaluation or accomplishment of the funded account fails. All prop-style programs depend on it, and it is usually a very difficult task to pass this exam. The main point that you need to know is whether you have a static or a trailing limit and whether you measure it on a daily basis or overall basis. Knowing the type of limit that you work with can mean a lot for you.
Fortunately, it is possible to learn all the mechanics of the rule in advance, because it follows certain principles and is not based on luck. By knowing your buffer at any point of time, the limit will turn from the trap back to a simple numerical value displayed on your screen.
Static or fixed drawdown means that there is strictly fixed value for your limit and this value does not change with increases in your profit. If you have got $5,000 account with the 10% drawdown, the level for your account would always be equal to $4,500. Remember that it does not matter what quantity your equity has, as the failure will occur only when your account reaches a level of no more than $4,500.
A main advantage of using the static (or fixed) type of drawdown limit lies in the initial nature of this structure. If you increase your account from the initial $5,000 to $6,000, your drawdown level is still $4,500, so you have got a cushion of $1,500 under your feet while your funds are in danger. It means that you will get every dollar that you accumulate.
The main downside that you may face with the static drawdown limit is related to the fact that you may not feel any risk of falling down on your account even when you know that your account is far over the limit. However, in terms of survival the static structure represents itself as the best option.
The trailing type of drawdown is the most dangerous for the traders, as the limit is not fixed. The limit, in this case, would go up with your profits on your account. Instead of being fixed, the limit has to be recalculated all the time when the equity level increases, because the floor level is tied to the highest amount of your equity reached.
Let?s take the example of a $5,000 account with the $500 (10%) trailing limit. You have got $4,500 floor for your account. You have opened a position on BTC, and the equity amount goes up to $5,600. Once you reach a peak of $5,600, the limit goes up to $5,100. And if you reach $5,900, the limit will go up again to $5,400.
As you can see from the given example and description of the trailing drawdown structure and operation, you could have been losing your account even during a small correction of the price and having enough profit before that.
By knowing the two types of drawdown limits you could see their function. Let?s take your funded account with the $5,000 amount of money and the $500 trailing limit. You opened a position on BTC, and your equity amount rises to $5,600. The limit goes up to $5,100. Again, at some moment a correction starts on BTC, so your equity decreases to $5,380, and you lose your account.
Let's compare the result of your trade with the result obtained in case of having the static drawdown limit, under which the limit value does not change, and equals always $4,500.
Your trade will die under the static drawdown condition only after your equity falls down below the level of $4,500, so your account remains safe. Here, we can make the conclusion that making an analysis of your limit type is as important for your trading as your trading ideas themselves.
To keep funded accounts alive, you must master a skill that is rather dull. To find out how much you are able to have on your funded account at any time, compute your current floor and subtract it from the actual equity. The difference between both numbers is called buffer; thus, each time you enter a new position in a funded account, you need to size it in a such a way that a reasonable adverse move cannot take away your buffer.
When a new peak of your equity appears, you should recalculate your floor because the ceiling has shifted up. This is exactly the skill that should be performed in a simulation environment first. In BuyCrypt, you can see how your equity operates thanks to real-time demo terminal. Even the unrealized profit and loss can be seen to determine the trailing limits. When you breach your simulated floor, you will pay nothing except for the knowledge gained through practice. The good thing about BuyCrypt is that all accounts work under the same mechanics, so the skill that you will develop meaningless for you after you have been funded.
BuyCrypt is a trading simulation that requires skills, but it is not to be confused with an exchange or the way to buy crypto.
In some programs, trailing stops at maximum your starting balance turning into a static level. In this case, you should follow the expected behavior of the trading drawdown till there is a set exception.
If you have unrealized profit, you always need to take it into account. Depending on trailing structure, you can even have unrealized profit and still break through a trailing level.
In order to avoid a day break, a trader should compute his buffer, where he takes current equity minus current floor, and do not increase the size of his positions over that number. With a trailing limit, you should recalculate your floor every time you have a new equity peak if you have hit it. Remember about taking into account daily limits and try to get away from your limit.
It often depends on whether or not your drawdown is trailing. Static drawdowns involve a fixed floor, while in case of trailing, the floor moves up.
Overall drawdown represents a limit for one's account throughout its life, while daily limits indicate the amount of the loss that can happen on a daily basis starting at the beginning of the day as well.
