Static vs. Dynamic Drawdown (Trailing) in Funding Companies
When choosing a Prop Firm to invest your time and money in, account size or profit sharing percentage are not the most important thing. The most critical and decisive rule of all isHow do they calculate your maximum allowable loss?.
There are two main modes in the industry that will define whether you are successful in the long term or if you are destined to fail mathematically: theStatic Drawdownand theTrailing Drawdown (Dynamic).
Trailing Drawdown
Trailing Drawdown is dynamic. This means that the loss limit (Maximum Drawdown)pursue your highest balance or equityas you win money, but it never goes down when you lose.
- Trailing Drawdown Example:You buy a $100,000 account with a 5% drawdown ($5,000). Your minimum allowed balance is $95,000.
- The deception:You have a good day and win $4,000. Your balance goes up to $104,000. Automatically, your stop loss follows that profit and is placed at $99,000 ($104,000 - $5,000).
- Burning account:The market pulls back (which is normal) and you lose $3,000. Your balance is now $101,000. You are $1,000 in profits on your initial capital, but the company takes your account because you touched $99,000!
Trailing Drawdown punishes success. It forces you to close trades prematurely for fear that the market decline will take away your account. It is a model statistically designed to make you lose.
Static Drawdown (The Professional's Choice)
HeStatic Drawdown(Static Drawdown), on the other hand, is always calculated on the initial account balance, no matter how much you earn.
Following the same example: if your account is $100,000 and your maximum loss limit is $90,000 (10%), that limit of $90,000never movesup. If you manage to raise your account to $105,000, you now have a cushion of $15,000 of margin for error instead of just $10,000.
Static Drawdown allows you to apply true statistical strategies. It allows you to breathe, endure the logical setbacks of the market, let your profits run until the Take Profit and operate without the constant stress of a small setback disqualifying you.
Our Mathematical Recommendation
At Funded Trader, our unbreakable rule isNever, under any circumstances, purchase reviews with Trailing Drawdown. Companies like FTMO, FundedNext and Funding Pips offer static or previous day's balance-based stop loss models, which are infinitely more trader-friendly.