What Is Max Daily Drawdown in Prop Trading?

📉 What Is Max Daily Drawdown in Prop Trading?

Max Daily Drawdown is a critical risk management rule used by proprietary trading firms (prop firms) to limit the maximum loss a trader can incur within a single trading day.
If your losses exceed this limit, it can trigger serious consequences such as:

●    Immediate disqualification from a challenge

●    A reset of your evaluation account

●    Loss of a funded trading account

This rule is most commonly enforced during trading evaluations to assess how disciplined and consistent a trader is, especially under pressure.

🧠 Why Do Prop Firms Use a Daily Drawdown Rule?

Prop firms provide traders with access to substantial capital. In return, they expect responsible risk management. The Max Daily Drawdown rule exists to:

●    🔒 Protect firm capital from significant or emotional losses

●    🎯 Encourage disciplined trading by limiting impulsive decisions

●    📊 Promote long-term consistency over risky "all-in" strategies

This rule isn't just about limits—it's a test of your ability to control risk like a professional trader.

📏 How Is Max Daily Drawdown Calculated?

Different proprietary trading firms use different methods to calculate their daily drawdown threshold. Here are the two most common:
1️⃣ Static Daily Drawdown (Based on Starting Balance)

This approach calculates your loss limit using your account balance at the start of the trading day.

Example:
●    Starting Balance: $100,000

●    Max Daily Drawdown: 4%

●    Daily Loss Limit: $4,000

Even if your equity grows to $105,000 daily, the $4,000 limit is still based on your starting $100,000 balance.
✅ TEFS uses this method, which is considered trader-friendly and allows for more flexibility in your trading strategy.

2️⃣ Trailing Daily Drawdown (Based on Intraday Equity High)

With this method, the drawdown is based on the highest equity your account reaches during the day, adjusting upward as you make gains.

Example:
●    Start at $100,000

●    Reach $103,000 intraday.

●    5% drawdown limit is now applied to $103,000

●    New Loss Limit = $97,850

❗ If your equity falls below that level—even from unrealized losses—you’ve breached the rule.
🔻 This method is stricter and often penalizes traders for giving back profits too quickly.

🧮 What Counts Toward the Max Daily Drawdown?

Both realized and unrealized losses are counted toward your drawdown.
●    Realized Losses: Losses from trades you've closed

●    Unrealized Losses: Losses from trades still open

📌 Important: Even if you still hold a losing trade, that floating loss still affects your daily drawdown total.

Scenario:
●    Account size: $100,000

●    4% Daily Drawdown Limit = $4,000

●    Open position is down $3,500

●    You take another $500 loss on a separate trade.

➡️ Result: Total loss = $4,000 → You've violated the rule.
✅ On the flip side, open profits can give you more breathing room within your limit.

🧠 Risk Management Tips to Stay Within the Daily Drawdown

Avoiding a breach of your daily drawdown limit is essential to passing evaluations and keeping funded accounts. Here are some practical tips:

✅ Set Daily Risk Limits
●    If you risk 1% per trade, you will have 4 losing trades before hitting a 4% daily limit.

🚫 Avoid Overtrading
●    Don’t increase your lot size or revenge trade after a loss. This usually leads to a quick breach.

📈 Monitor Your Equity in Real Time
●    Keep a close eye on floating losses throughout the day.

⛔ Always Use Stop-Loss Orders
●    Fast market moves can wipe out your account if you're not protected.

❌ What Happens If You Break the Max Daily Drawdown Rule?

The consequences depend on your account type:

●    During an Evaluation Challenge:
 You fail the challenge immediately—no second chances.

●    On a Funded Account:
 You may lose access to the account and any pending payouts for the period.

👉 At TEFS, traders are expected to respect this rule as part of a professional trading mindset.

🔎 Final Thoughts

Understanding and managing Max Daily Drawdown is key to succeeding in the world of funded trading programs. Whether aiming to pass an evaluation or stay funded long-term, respecting your daily limits is a sign of a disciplined, professional trader.
Want to trade real capital with fair rules and flexible limits?

 👉 Explore TEFS evaluation programs today.