Drawdown and risk limits

Balance-based drawdown

A drawdown measured against closed balance rather than live equity. Floating losses on open positions do not move the breach level; only realised results do, once a trade is closed.

Breach

Any violation of an account's published rules. Breaches are graded: a soft one triggers corrective action, a hard one fails the account. The word is used for both, which is why the grade matters more than the term.

Buffer

The distance between current equity and the nearest breach level. It is the only figure that tells you how much risk is available right now, and it shrinks with commission and floating losses as well as with realised ones.

Daily loss limit

The most an account may lose in one trading day before it breaches. Calculated as a percentage of the previous day's closing level, it resets at a fixed time each day and is the rule that ends most evaluations.

Drawdown floor

The account level at which a maximum drawdown breach is recorded. It is the starting balance minus the drawdown allowance, expressed as a dollar figure rather than a percentage, and it is the single number to trade against.

Drawdown recovery

The gain required to return an account to its previous peak after a loss. Recovery is not symmetrical: a 10% loss needs an 11.1% gain to undo, and a 50% loss needs 100%.

Drawdown reset

The moment a drawdown calculation is recalculated from a new reference level - most often the daily loss limit rolling over to a new day, or an account level being restated after a withdrawal.

End-of-day drawdown

A drawdown calculated only from the closing balance of each trading day, ignoring whatever happened between the open and the close. Intraday excursions are invisible to it as long as the day finishes above the level.

Equity curve

A chart of account equity over time. Its slope shows the rate of return, its smoothness shows consistency, and its deepest dip is the peak-to-trough drawdown a risk limit would have had to absorb.

Equity-based drawdown

A drawdown measured against live account equity, which includes the unrealised profit and loss of every open position. The breach level can be touched while a trade is still running, before anything is closed.

Hard breach

A violation serious enough to fail or terminate the account immediately. Exceeding the daily loss limit or the maximum drawdown is the usual cause, and a later recovery in the market does not reverse it.

High-water mark

The highest level an account has ever reached. On a trailing drawdown it is the reference point the floor is measured down from, so every new high permanently moves the breach level upward.

Intraday drawdown

The worst point an account reaches during a single trading day, measured from that day's starting level. It is what a daily loss limit monitored on equity actually tests, rather than where the day happens to finish.

Maximum adverse excursion

The furthest a trade moves against you before it closes, whatever its final result. Measured per trade, it shows how much room a strategy genuinely needs rather than how much it eventually used.

Maximum drawdown

The total loss an account may take before it is failed. Expressed as a percentage of the starting balance, it sets a floor: touch it and the account breaches, whatever the account has made up to that point.

Non-trailing drawdown

A maximum drawdown calculated once against the starting balance and then left alone. The breach level is the same number on your first day and after months of profit, so the cushion grows with every dollar you make.

Peak-to-trough

The decline from an equity curve's highest point to its lowest subsequent point before a new high is made. It is the standard way of stating how deep a strategy's worst historical losing run was.

Risk of ruin

The probability that a sequence of trades takes an account to its breach level before it reaches its target, given a win rate, a reward-to-risk ratio and a risk per trade. It is driven mostly by position size.

Soft breach

A rule violation that triggers corrective action - a position closed, a warning, a review - without failing the account outright. The account survives, but the trade or the profit attached to it may not.

Trailing drawdown

A maximum drawdown whose floor follows the account upward as it makes new highs. The distance between your peak and the breach level stays constant, so every new high moves the stop-out level with it.