How a trailing drawdown blows a prop eval that’s in profit

Up $1,500 on Wednesday, done on Thursday, still up $600. An illustrative example with generic rules and made-up trades, the three things that would have saved it, and the one number to check every night.

Illustrative example. Generic rules, made-up trades, no particular firm.

Here are the rules. A $50,000 evaluation. Profit target $3,000. A $2,000 drawdown that trails intraday: the floor sits $2,000 below the highest equity the account has ever shown, open profit included, and it never moves back down.

The trader runs 2 micro Nasdaq contracts. That’s $4 per index point.

The week

Monday. A long runs 200 points in their favor (+$800 open), then gives some back. Closed at +125 points: +$500. Balance $50,500. Highest equity seen $50,800. Floor $48,800. Room left: $1,700.

Tuesday. Another long runs 300 points (+$1,200 open). Closed at +250 points: +$1,000. Balance $51,500. Highest equity $51,700. Floor $49,700. Room left: $1,800.

Wednesday. A long runs 275 points (+$1,100 open). Then the market turns and the trader holds for a bounce that doesn’t come. Closed at entry: $0. Balance still $51,500. But highest equity is now $52,600, so the floor moved up to $50,600. Room left: $900.

Here’s what the trader sees Wednesday night: up $1,500, halfway to the target, $3,500 above where the floor started. Here’s what the account sees: $900 from the end.

Thursday. One ordinary losing trade, a 225-point stop on 2 micros: –$900. Balance $50,600, which is exactly the floor. The account is closed. It’s still $600 in profit.

No single day was reckless. Nothing was bigger than a normal stop. The account died from a trade that closed at zero.

Three things that would have saved it

1. An exit for open profit, not just a stop for losses. Say the rule is: once a trade is well in profit, if it gives back half its best open gain, it’s out. Wednesday closes at +137.5 points (+$550) instead of zero. Balance $52,050, floor $50,600, room $1,450. Thursday’s loss leaves $550 to spare.

2. Smaller size. On 1 micro, every number above halves. Wednesday’s give-back moves the floor $450 instead of $900. Room Wednesday night is $1,450, and Thursday’s loss is $450.

3. Know which kind of trailing you’re on. Under a trailing limit measured on end-of-day balances, the floor follows closing balances only. Wednesday’s highest close is $51,500, so the floor sits at $49,500 and room is $2,000. Thursday’s loss takes it to $50,600 and the account lives.

The one number to check every night

Room = today’s equity minus (highest equity ever shown minus the limit).

Not your profit. Not your distance from the start. That number. If it’s shrinking on days you finished flat, open profit is moving your line, and your exits are what need fixing, not your entries.

How we handle it

Every engine we run is sized to its drawdown before anything else: the drawdown bar is set in advance, from testing, and the size follows from it. Our two micro engines trade in public as Orthant Duo on Collective2, where every closed trade is listed after costs: collective2.com/details/157794444.

The trading example above is illustrative and hypothetical. Educational, not individual advice.