The trailing drawdown is a dynamic risk parameter that follows your account’s unrealized profits during an open trade. Here’s how it works in practice:
How Trailing Drawdown Works
When you open a trade and it moves in your favor, the trailing drawdown rises with your unrealized profits. However, once you close the trade, the trailing drawdown locks in at that higher level and never moves down again. This creates a ratcheting effect where your drawdown floor continuously rises as you make profits.
Example: You start with a $50,000 account and a $2,500 trailing drawdown. Your initial drawdown floor is $47,500. You open a trade that goes +$800 in your favor. The trailing drawdown rises to $3,300. You close the trade. Your new drawdown floor is now $46,700 ($50,000 – $3,300). Even if you lose money on future trades, the drawdown floor will never drop below $46,700.
Why This Matters
The trailing drawdown mechanism means that your risk space continuously shrinks as you make profits. This is why many traders pass the profit target but fail the evaluation due to drawdown violations. The key is to manage your trades carefully, taking profits at reasonable levels rather than holding for home runs.
Our funded account management service uses specific position sizing formulas that account for the trailing drawdown mechanics. We typically risk no more than 0.5-1% of the account per trade, ensuring we have enough buffer to withstand losing streaks while still achieving the profit target within a reasonable timeframe.
Strategies to Manage Trailing Drawdown
- Scale out of winners: Take partial profits at predefined levels to lock in gains while letting runners continue.
- Use tight stop losses: Limit your risk per trade to preserve drawdown buffer.
- Avoid overtrading: Quality over quantity. Wait for high-probability setups.
- Track your drawdown: Monitor your trailing drawdown daily and adjust position sizes accordingly.
- Take profits consistently: Don’t get greedy. Small consistent wins add up faster than you think.
