Trailing Drawdown

A static drawdown limit asks one question: how far below the starting balance is the account allowed to fall? A trailing drawdown asks a harsher one: how far below its best moment is the account allowed to fall? The floor is defined as the high-water mark minus a fixed allowance, and it ratchets — every new equity high drags the floor up behind it, permanently. The account’s past success continuously raises the bar for its survival.

The rule is standard in prop-firm evaluations, and its variants differ in one detail that dominates everything else: what counts as the high-water mark. End-of-day trailing uses the closed daily balance. Intraday trailing uses the equity peak including open positions — meaning an unrealised profit spike that was never banked still raises the floor. Under that variant, a winning trade that surges and then retraces can single-handedly end the evaluation: the surge lifts the floor, the retrace crosses it, and the account is breached by a trade that closed green. The account is killed by its own unrealised high.

The arithmetic deserves more respect than it gets. The allowance quoted in the rules is not the room the trader has; the room is the allowance minus the current distance below the high-water mark, and it shrinks with every new peak until (in most implementations) the floor locks at breakeven or above. Position sizing that conditions on account balance is therefore conditioning on the wrong variable — the operative quantity is distance-to-floor, restated after every equity high. A ratcheting floor also converts volatility itself into risk: the same drawdown excursion that a static limit absorbs can breach a trailed one, so the risk of ruin against a trailing barrier is strictly higher at identical sizing. The Prop-Evaluee Risk Guardian we are building is intended to compute that halt distance live, against the evaluation’s actual rules rather than the trader’s recollection of them.