What is the Max Daily Drawdown "MDD"?

Drawdown rules are in place to prevent excessive losses. Traders must monitor their risk levels and adhere to drawdown limits to avoid account termination.

1-Step Challenge

The 1-Step Challenge does not have a Maximum Daily Drawdown (MDD). Instead, it enforces a single Maximum Absolute Drawdown of 5%.

2-Step Challenge

Unlike the 1-Step Challenge, the 2-Step Challenge does have a Maximum Daily Drawdown (MDD) of 5%:

Drawdown Type: Balance-Based
Drawdown Calculation: Static

The 2-Step Challenge applies the following drawdown rules:

Maximum Daily Drawdown (MDD)
- Resets daily at midnight broker time (GMT+2).
- Losses, including floating losses, should not exceed the MDD USD value on any day.
- Formula:
  - MDD = Initial Account Balance x 5%
Daily Stopout Level (DSL)
- Calculated to define the threshold at which the account is stopped out for the day.
- Formula:
  - DSL = Start of Day Balance - MDD USD Value

Examples:

Day 1: Initial Balance = $100,000
- MDD = $100,000 x 5% = $5,000.
Day X: Start of Day Balance = $104,000.
- DSL = $104,000 - $5,000 = $99,000.

If the total losses for the day, including floating losses, equal $5,000, the account stops trading once the balance or equity drops to $99,000.

Want to learn about drawdown in prop trading? Check out this insightful blog post: What is Drawdown in Prop Trading?