Explainer
Trailing drawdown explained
A trailing drawdown is a loss limit that rises with your account’s highest balance, so the room you have is measured from the new peak, not from the start.
Updated
The short version
A fixed loss limit sits at one level. Lose down to it and the account is out. A trailing loss limit starts at a level too, but it moves. Each time the account makes a new high, the limit moves up with it.
So the room you have is the distance between your highest balance so far and the limit. A good day does not give you more room. It moves the floor up, and the room you started with stays the same size.
- Trailing drawdown
- A loss limit that follows the account’s highest balance upward.
- High-water mark
- The highest balance, or equity, the account has reached so far.
- Fixed drawdown
- A loss limit that stays at one level measured from the starting balance.
- Floor
- The balance at which the loss limit is hit.
How the floor moves
When the balance makes a new high, the floor rises by the same amount as the new high. When the balance falls, the floor stays where it was. In a plain trailing drawdown the floor only moves up.
That is why the same string of trades can be fine early and dangerous later. After a long run of gains the floor sits high, and a fall that the account would have absorbed at the start can now reach it.
In a plain trailing drawdown the floor only moves up. Every new high lifts it, and a loss never lowers it.
Does open profit count?
This is where programs differ, and where the rulebook matters most. Some measure the high-water mark on balances after trades close. Some measure it on equity, which includes open profit.
If open profit counts, a trade that moves in your favour and then comes back raises the floor even though you closed it flat. You gained nothing and the room you have shrank. Read the exact wording for your program, and do not assume it matches another one.
How it relates to max drawdown in a backtest
Max drawdown in a backtest is the largest fall of the cumulative result below its running peak, starting at 0. A trailing limit is built from the same idea: a running peak and a fall below it.
The difference is what each one does. A backtest’s max drawdown is a single number read after the run. A trailing limit is a floor that acts during the run and ends the account when touched.
Testing a rule against a trailing limit
Take a run’s trades in the order they closed and track cumulative net R. The deepest fall below the running peak is the number to hold up against the limit, once the limit is also in R.
To put the limit in R, divide the dollar room your program allows by the dollars you risk on one trade. The result is how many full stops the room holds. If you risk less on each trade, the same room holds more of them.
Remember that a backtest orders the trades one way. The same trades arriving in a different order could produce a different deepest fall, so a single run is one path, not a limit on the next.
Questions and answers
What is a trailing drawdown?
It is a loss limit that follows the account’s highest balance upward, so the limit is measured from the new peak rather than from the starting balance.
Does a trailing drawdown include unrealised profit?
It depends on the program. Some measure the high-water mark on equity, which counts open profit, and some on closed balances. Read your program’s wording.
Is a trailing drawdown the same as max drawdown?
They use the same idea, a fall below a running peak. Max drawdown in a backtest is a number read after the run. A trailing drawdown is a live floor that can end the account.
Does the floor ever stop moving up?
Some programs stop it at a stated level, and some do not. We do not give figures because they differ, so check your own rulebook.
How do I test a strategy against a trailing limit?
Put the limit in R, then compare it with the run’s largest fall of cumulative net R below its running peak.