Recovering from Drawdown in a Prop Trading Account: Protecting Against Max Daily Loss
For prop traders, encountering drawdowns on funded accounts is a common challenge in their forex trading journeys. Adhering to drawdown limits, such as Max Loss and Max Daily Loss, is crucial when trading for a proprietary firm. Recovering from a drawdown on a prop firm account is a distinct process, significantly more complex than in a personal account, as the allowable loss is typically limited to around 8-15% (Max Loss).
In the following article, we present a solution that can help you shield your account from reaching the Max Daily Loss threshold, which typically hovers around 5-6% on average. For instance, popular prop firms like E8 Funding,FundedNext, and The Funded Trader maintain Max Daily Loss limits of 5% or 6%.
Let’s check what the drawdown actually is:
Types of drawdowns
Understanding Relative and Absolute Drawdown in Trading
Success in trading hinges on comprehending the distinction between relative and absolute drawdown. Proprietary trading firms use these concepts to regulate risk and safeguard traders’ accounts.
Many prop firms, such as FTMO, employ absolute drawdown calculations. This method sets a fixed limit on the amount a trader can lose based on the initial account balance. Absolute drawdown is a static figure, and it doesn’t change as the account grows. This approach is effective in preventing traders from excessively compounding their accounts or increasing their lot sizes, which can lead to significant losses.
For instance, consider a prop firm with a 5% relative drawdown policy. On a $100,000 account, the maximum allowable loss is $5,000, resulting in a stop-out or termination level of $95,000. However, if you generate a profit, let’s say $200, your new stop-out level adjusts to $97,000, ensuring that you can still only lose a maximum of $5,000. In contrast, with absolute drawdown, the stop-out level remains fixed at $95,000, irrespective of any profits earned.
Understanding these drawdown concepts is crucial for traders, as it can significantly impact their risk management strategies when trading with proprietary firms.
Protecting Your Account from Drawdown with Equity Sentry EA
For forex traders looking to safeguard their accounts from unexpected drawdowns, Equity Sentry EA is a powerful software tool designed to provide comprehensive account protection. This expert advisor offers a range of features and functions to ensure your trading capital remains secure.
The primary function of Equity Sentry EA is to enable traders to set a “Hard Stop” level, which acts as a fail-safe mechanism to protect their accounts from excessive drawdowns. This feature serves as a crucial safety net, ensuring that if the market price reaches a specified level, all open positions are closed and all expert advisors (EAs) are disabled.
Equity Sentry EA is specifically designed for MetaTrader 4 (MT4) accounts and operates around the clock, monitoring your trading account for predefined conditions. When those conditions are met, it takes specific actions to protect your capital. For example, if the market price drops to a particular level, the EA closes all open positions and deactivates other EAs to prevent new trades from being initiated.
One notable advantage of Equity Sentry EA is its ability to block other EAs from opening new trades after a Hard Stop is triggered. This unique feature ensures that your account remains safe from additional trading activity, even if you’re using other trading robots.
Moreover, Equity Sentry EA not only monitors open positions but also tracks closed trades. This means it can automatically detect a series of closed losing trades and initiate necessary security measures to mitigate losses.
In summary, Equity Sentry EA serves as a valuable tool for traders seeking to protect their trading accounts from drawdowns and enhance risk management. It offers a range of features that can help you maintain a low drawdown, ensuring the safety of your trading capital.
