The drawdown on a funded account is the contraction in the equity of that account from a high point down to a low point subsequently caused by losing trades. It measures the magnitude of a loss in capital of that account over a specific period, often as a percentage, and is the most important aspect for funders who have their funds placed with proprietary trading firms.

A few key points about drawdown, when a funded trading account exists, are as follows:

Types of Drawdown Limits: There are specific types of drawdown limits placed on funded trading accounts that the trader should not breach to continue having access to the account. Mainly, there are two types:

Daily Drawdown: The highest amount of money a trader can lose within a day. If it is breached, the funded account might be closed or reset.
Total Drawdown: The maximum percentage of total capital that can be lost throughout the account's lifetime. If breached, the account might also be closed or reset.
Drawdown Calculation: The drawdown calculates determining the account equity's peak or balance and comparing the lowest equity point after its peak. For example, if a specific account displays a peak of $10,000 and drops to $9,500, the drawdown would be:

Drawdown

Peak Equity
−
Lowest Equity
Peak Equity
×
100
Drawdown =
Peak Equity
Peak Equity−Lowest Equity
​​
×100
10
,
000
−
9
,
500
10
,
000
×

100

5%
10,00010,000−9,500
​​
×100=5%.

Impact on Trading Strategy: A trader needs to change trading strategies in such a way that it does not reach the draw-down limit. Risky strategies have the probability of crossing the draw-down threshold and deactivating the account.

Psychological Point: Psychological pressure is built against the trader to hit the draw-down limits to recover quickly. The trader should be in control of emotions during the draw-down period so that he can carry out the trading activity uninterruptedly.

It is very important to understand and manage drawdown on a funded account, ensuring longevity in trading and maintaining the account with possibly steady profit growth while observing the rules of the proprietary firm.