What is drawdown and why does it matter so much?
In the world of trading, especially when you are participating in a funding evaluation, understand the concept of Drawdown It's essential. Not only is it a key metric for measuring your performance, but it can also be the difference between advancing or losing your evaluation score.
In this article, we explain what drawdown is, the different types that exist, and why you should pay close attention to it if you want to become a funded trader.
What is drawdown?
El Drawdown represents the reduction of capital from a maximum point to a minimum point over a series of trades. In other words, it measures how far your account has fallen before recovering.
It can be expressed in two ways:
Absolute (in money): the exact difference between the highest and lowest balance.
Relative (in percentage): how much this drop represents with respect to the total capital.
Example:
If your account reaches $10,000 and then drops to $9,000, your drawdown is $1,000 or 10%.
Types of drawdown you need to know
1. Maximum drawdown
It's the largest loss recorded between a peak and a trough. It's key to assessing a strategy's historical risk.
2. Daily Drawdown
Many prop firms They set a daily loss limit. If your account drops more than that percentage or amount in a single day, you may be disqualified.
3. Trailing drawdown
Also called “dynamic drawdown.” This limit increases as your capital increases, but don't go back if you have losses later. It is one of the most difficult to handle for evaluated traders.
Why is it so important in funding evaluations?
Funding companies want traders who can control the risk, not just making money. The drawdown shows them if you know preserve capital.
Some key reasons:
Controlling drawdown is a mandatory requirement in most funding programs.
Exceeding the limits (daily or maximum) implies immediate removal from the evaluation, even if you are in profit.
It is a reflection of your discipline as a traderA low drawdown indicates that you manage losses well.
How to avoid excessive drawdown?
Use an appropriate batch size. Not over-leveraging is the golden rule.
Set a personal daily loss limit, even below the permitted level.
Take partial profits to ensure results and reduce exposure.
Avoid trading during times of high volatility if you are not prepared.
Keep a trading journal to analyze when and why you fall into drawdown.
Conclusion
Drawdown isn't just a number: it's a clear indicator of how you manage risk. If you want to pass a funding evaluation and be profitable over the long term, you need to understand it, respect it, and design your strategy to prevent it from becoming an obstacle.
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