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Funded Account Drawdown
All prop firm traders will find themselves in a Drawdown on a funded account at a certain point in their careers. When trading for a prop firm, it is important to understand the amount of drawdown allowed and time expiration Days in order to be able to recover in time and avoid losing the account.
Recovering from a drawdown on a prop firm account is different from a personal account since the amount allowed to lose is limited, and strict risk management is needed.
This article discusses how to recover from a drawdown while managing a prop firm account.
Understanding The Prop Firm DD
All prop firms have a certain amount of money they allow you to lose, that is, the drawdown permitted to use, with some of them on the first and second stages, you’ll also have a limited time.
Once you reach the drawdown limit, your account will be terminated. That is the key difference from a personal account, where you have no loss limit, and that is why it is so important to manage risk appropriately.
Usually, the drawdown given on most prop firms varies from 4% to 10% of the account. In essence, there is no much difference in how much drawdown you are allowed; you just need to adjust your risk per trade according to the percentage given.
In addition, many prop firms will ask you to achieve a certain profit target in a specific period of time, in some cases putting some pressure on the trader and eventually leading to making mistakes that will incur the trader into drawdown.
There are two types of drawdown, let’s understand the differences:
Relative Drawdown(Static Drawdown) V.S. Absolute Drawdown
Understanding the difference between relative and absolute drawdown in the prop firm context is key to success.
Many prop firms will calculate the drawdown allowed on a fixed basis. A fixed amount of money the trader is allowed to lose is calculated from the initial account balance. This is known as absolute drawdown.
Still, some prop firms will ask you to respect a relative drawdown, where the stop-out level trails as your account grows and is calculated every time the highest equity point is reached. Relative drawdown keeps the trader from compounding the account and increasing the lot size used.
Example of relative drawdown: Let´s say a prop firm has a 5% relative drawdown on their accounts. On a $10K account, the maximum amount of money to be lost is $500, being $9,500 at the stop out or termination level.
But when you make a profit of, let’s say $200, your new stop-out level is adjusted to $9,700, always allowing you to lose only $500. In Absolute Drawdown, on the other hand, your stop out level stays the same $9,500.
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What To Do After A Series of Losses
Usually, a series of losses leads traders into drawdown. So before anything, we need to stop the bleeding and avoid getting stopped out. If you find yourself in a series of losses and getting into drawdown, do the next:
- Stop Trading, and take a break- Let your mind calm down and the market “reset” for you before making a costly mistake.
- Review what is failing– your system is formed by your strategy and you, the trader. If the trader is failing, take a break. If you were executing your strategy properly and still getting many losses, then review your strategy.
- Tune your trading strategy and stick to your rules– maybe the character of the market has changed? Maybe it changed from a range into a trend? Adapt your strategy to the new market context before continuing trading.
- Develop a Positive Trading Mindset– Remember all the good results you have had and what you are capable of doing. Rebuild your confidence and go back to the ring!
Here is a great webinar by Gil Ben Hur about the correct mindset, the key for success in trading. Gil is giving pro mental tools for achieving maximum performance in trading.
How To Start Recovering From Your Drawdown
After you have stopped and identified the problem, now its time to slowly get out of your drawdown. Here’s how:
Be patient
Recovering from a drawdown may be a slow process. Rushing will only make the hole deeper.
Watch your Lot size
Do not increase your exposure to the market. That will only mess with your mind and keep you from executing your strategy properly. The distance to your stop-out level should be considered your account size to calculate the risk per trade.
Plan your trades in advance
Mark the points you would enter a trade to avoid improvising. Do not force yourself to take trades. Let the graphs come to your entry points, and only then pull the trigger.
Psychology
Understand that you need to be true to your strategy from now on, avoiding impulsive trading. If that requires not trading for a week, so be it. Stick to your plan.
Goal
Although you will not withdraw a profit soon, the goal of recovering from the drawdown will be a priceless lesson for you.
How To Avoid DrawDown in The Future
An account drawdown is the result of many trades drawdowns. So in order to avoid future account drawdown, you need to be very cautious and selective with your trades.
- Execute only high-probability setups delivered by your strategy.
- Avoid risking “too much” in a single trade. Spread your risk over many trades.
- Accept when a trade is going against you and cut the loss.
By keeping your trades drawdown small, you will assure your overall balance stays positive. If you are using a positive and tested strategy, you need to let your stats play in your favor over a period of time. Live another day to trade.
Drawdown on A Funded Account Summary
Prop firms have a certain amount of money they allow to lose before terminating a trading account. Traders must adjust their risk management to that drawdown so they do not incur too deep in it.
Recovering from a drawdown on a funded account will be a slow process where a correct mindset is imperative.
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