What happens to my open positions when I'm close to my balance drawdown limit?

Your open positions don't count toward balance drawdown until you close them, but you need to be extremely careful. If closing losing positions would push your balance beyond the drawdown limit, you could instantly fail your account. Many traders monitor their potential total drawdown including unrealized losses.

Can I avoid drawdown violations by never closing losing trades?

This is a dangerous strategy that typically backfires. While keeping losing trades open delays the impact on your balance drawdown, you'll eventually be forced to close due to margin calls, fundamental changes, or firm requirements. Plus, you're tying up capital and taking ongoing risk.

How do I calculate my high watermark for balance drawdown?

Your high watermark is the highest closed account balance you've achieved, updated each time you close profitable trades that push your balance to a new peak. It's not your highest equity level, only your highest balance from completed trades.

Is balance drawdown better than equity drawdown for new traders?

Balance drawdown is generally more forgiving and allows for better trade management, especially for swing trading. However, it can create false confidence and lead to poor risk management on open positions. New traders should still maintain strict risk controls on all positions regardless of the drawdown calculation method.

Risk Management

Balance Drawdown: The Prop Trading Risk Rule That Only Counts Closed Trades

A drawdown rule calculated from the closed-trade account balance rather than live equity, offering more flexibility for traders holding open positions.

Last updated: 2026-04-01

Full Explanation

Imagine you start a prop firm challenge with $100,000 and your balance drawdown limit is 10%. You make some profitable trades and your closed balance reaches $105,000, setting a new high watermark. Then you take a losing trade that closes for a $3,000 loss, bringing your balance to $102,000. Next, you enter a swing trade that's currently down $4,000 in unrealized losses. Your live equity shows $98,000, but your closed balance remains at $102,000. Under a balance drawdown rule, you're still safe because your closed balance of $102,000 is only 2.9% below your peak of $105,000. The unrealized loss on your open position doesn't count against your drawdown limit yet.

This example illustrates the core advantage of balance drawdown over equity drawdown rules. Balance drawdown gives you breathing room to hold positions through temporary adverse moves without immediately violating your account limits. The rule only considers money that's actually been won or lost through completed trades, not the paper profits and losses fluctuating in your open positions.

For prop traders, understanding this distinction is crucial because it fundamentally changes your trading strategy and risk management approach. When you're operating under a balance drawdown rule, you can afford to give your trades more room to develop. You might hold a swing position overnight or through a news event without constantly worrying that a temporary spike against you will breach your drawdown limit and fail your account.

The calculation is straightforward but requires careful tracking of your high watermark. Your balance drawdown is measured from the highest closed balance you've achieved, not your starting balance. Every time you close a profitable trade that pushes your account balance to a new peak, that becomes your new reference point. If your peak closed balance was $108,000 and your current closed balance is $103,000, you're sitting at a 4.6% drawdown regardless of what your open positions might be doing.

This flexibility comes with a psychological trap that catches many traders off guard. Because your open positions don't immediately count against your drawdown, you might be tempted to hold losing trades longer than you should, hoping they'll recover. You could accumulate several open positions with significant unrealized losses while technically staying within your balance drawdown limit. However, the moment you close those losing trades, all those losses hit your balance simultaneously and could instantly breach your drawdown rule.

The timing of when you close trades becomes a strategic decision under balance drawdown rules. Some traders try to game the system by closing profitable trades quickly to boost their balance and high watermark while keeping losing trades open indefinitely. This approach typically backfires because those unrealized losses eventually become real, often at the worst possible moment when you're forced to close due to margin requirements or fundamental changes in your thesis.

Balance drawdown rules also affect how you should think about position sizing and correlation. Since only closed trades count, you might feel comfortable taking larger positions or holding more correlated trades simultaneously. However, remember that if multiple positions move against you and you need to close them quickly, you could face a sudden large drawdown to your balance that violates your limits.

The psychological comfort of balance drawdown can actually make you a better trader if you use it wisely. Knowing that temporary market noise won't immediately fail your account can help you stick to your trading plan and avoid premature exits driven by drawdown fear. You can focus on trade management based on your analysis rather than constantly calculating how close you are to your drawdown limit.

However, this same comfort can lead to complacency. Just because your balance drawdown looks healthy doesn't mean you should ignore the unrealized losses accumulating in your open positions. Those losses represent real risk and will eventually impact your account balance when positions are closed. Successful prop traders under balance drawdown rules maintain strict risk management on their open positions even though those losses don't immediately count against their limits.

Worked Examples

Example 1

Scenario:A trader starts with $50,000, makes $8,000 in profits (balance: $58,000), then takes a $2,000 realized loss (balance: $56,000). They have an open trade down $3,000 unrealized.

High watermark: $58,000. Current balance: $56,000. Live equity: $53,000. Balance drawdown: ($58,000 - $56,000) ÷ $58,000 = 3.4%

→Under a 10% balance drawdown rule, the trader is safe at 3.4% despite their equity being down 8.6% from the peak

Example 2

Scenario:A trader with a $100,000 account and 8% balance drawdown limit reaches $110,000 balance, then has $6,000 in realized losses and $4,000 in unrealized losses.

High watermark: $110,000. Current balance: $104,000. Balance drawdown: ($110,000 - $104,000) ÷ $110,000 = 5.45%

→The trader remains within the 8% limit despite $10,000 total losses because only the realized $6,000 counts toward balance drawdown

Example 3

Scenario:A trader at $105,000 balance peak drops to $98,000 balance (6.7% drawdown) and has $2,000 unrealized loss on an open position they must close.

Current balance: $98,000. After closing losing position: $96,000. New drawdown: ($105,000 - $96,000) ÷ $105,000 = 8.57%

→If the drawdown limit is 8%, closing this position would breach the rule and potentially fail the account

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How This Applies at Prop Firms

Most major prop firms like FTMO and MyForexFunds use balance drawdown for their trailing drawdown rules, calculating losses only from closed positions rather than live equity. The Funded Trader similarly applies balance-based calculations for their maximum loss limits. This gives traders more flexibility compared to firms that might use equity-based rules, allowing for better swing trading and position holding strategies during challenges and funded accounts.

Related Terms

These concepts are closely connected to Balance Drawdown

Equity Drawdown→Drawdown→Max Daily Loss→Static Drawdown→

Frequently Asked Questions

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