Funded Trading Account Maximum Drawdown Rule Explained
The terms and conditions under which pro trading firms provide funded accounts usually allow for a small amount of allowable loss (1-2% per trade, or 5% for the entire account). If you exceed the limit, you will probably lose your funded account.
Trading inevitably involves the risk of loss, so if you plan to trade on a funded account, you should clearly understand what can happen if your trades become unprofitable. In the worst case scenario, the proprietary trading firm will block your access to the funded account, meaning you will lose it.
Fund your account with Topstep!Can I lose money in a funded account?
Yes, it can be as a result of a single losing trade, or a series.
In this case, there are 2 options.
You do not exceed the Maximum Drawdown limit. Then you can continue trading your strategy.
You exceed the limit set by the firm. Then you lose access to the funded account.
What is maximum drawdown rule?
This limit is part of the terms and conditions under which proprietary trading firms provide private traders with funded accounts.
Rules for the traders. Source: https://the5ers.com
As observed from the above picture, prop trading firms have strict rules for the traders. The firms establish these rules to serve as a comprehensive risk management framework. They are created to protect the firm's capital investments, maintain trading consistency, and ensure compliance with regulatory requirements.
Further, they facilitate the evaluation of trader performance and play a crucial role in the long-term sustainability of the trading operation.
Proprietary trading companies can offer funded accounts with various terms and limits, including:
Profit split. Traders and the firm share profits, with specific ratios defined in the agreement (e.g., 80% to the trader and 20% to the firm).
Loss limits. Traders often have predefined maximum loss limits, and exceeding these limits may result in the termination of the funded account.
Risk management rules. Traders must stick to specific risk management guidelines, such as position sizing and exposure limits.
Trading style. The firm, based on its risk tolerance and objectives, may specify or restrict certain trading styles or strategies.
Asset classes. Funded accounts may be limited to trading specific asset classes, such as stocks, futures, or forex.
Trade duration. Some firms have particular rules regarding the minimum or maximum duration of trades, promoting a particular trading style.
Withdrawal rules. There are often restrictions on when and how traders can withdraw profits, which may be subject to performance goals.
Performance evaluation. Traders' performance is regularly reviewed, and account funding may be adjusted based on results.
Trading software. Proprietary trading firms may need traders to use their trading platforms or software.
Compliance and reporting. Traders must follow the regulatory compliance and provide regular reports on their trading activity.
These terms and limits help define the structure and expectations of funded accounts within proprietary trading companies.
What to do if I start losing money in a funded account?
Here are 5 tips, if you start losing money in your savings account:
Reduce volume in trades
Add a confirmation rules
Take a short break
Consider changing the market, timeframe.
Optimize indicator parameters
Study higher timeframes and news background. Don't they say that the market has changed its character?
Consult with a representative of a proprietary trading firm
So, are losses allowed in a funded account?
Yes, but not above the limits set by the company's rules. Adherence to risk management is paramount in trading, particularly when trading with a funded account.
It helps protect both the trader's and the firm's capital, ensuring a more sustainable and responsible approach to trading in the highly volatile markets.
Best Forex funded accounts
FAQs
How much do you need to get a funded account?
If you have between $100 and $200 - you have the minimum amount to apply to open a funded account.
How do I pass a 5k prop firm account?
To pass a 5k prop firm account evaluation, focus on consistent profits, strict risk management, and meeting performance targets outlined in the firm's guidelines.
What is a Funded Account in Forex?
A funded account in forex is a trading account where an external entity, like a proprietary trading firm, provides capital for a trader to continue in exchange for a share of the profits.
Can traders withdraw profits from funded accounts?
Yes, traders can usually withdraw profits, but withdrawal conditions and frequency may be subject to the terms of the specific funded account agreement.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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2
Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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3
Risk Management
Risk management is a risk management model that involves controlling potential losses while maximizing profits. The main risk management tools are stop loss, take profit, calculation of position volume taking into account leverage and pip value.
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4
Futures contract
A futures contract is a standardized financial agreement between two parties to buy or sell an underlying asset, such as a commodity, currency, or financial instrument, at a predetermined price on a specified future date. Futures contracts are commonly used in financial markets to hedge against price fluctuations, speculate on future price movements, or gain exposure to various assets.
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5
Leverage
Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.
Team that worked on the article
Upendra Goswami is a full-time digital content creator, marketer, and active investor. As a creator, he loves writing about online trading, blockchain, cryptocurrency, and stock trading.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).