Drawdown and risk limits
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.
Also called: Equity high · Peak balance
GFN’s figure
GFN's Instant drawdown trails the high-water mark by 5%. The 1 Step drawdown trails during the evaluation until the floor reaches your starting balance, where it locks. The 2 Step ignores the high-water mark entirely.
- InstantTrails the high
- Yes, by 5%
- 1 StepTrails the high
- Until the floor reaches the starting balance, then locks
- 2 StepTrails the high
- No
In detail
High-water mark,explained
The high-water mark only ever ratchets up. Making a new high tightens a trailing account rather than loosening it, which is the part traders find counter-intuitive: the better the week, the less room below.
The same term is used in fund management for the level a manager must exceed before performance fees are charged again. In prop trading it is almost always the drawdown reference instead.
Worked example
A $100,000 Instant account that peaks at $108,000 carries a floor of $103,000 from that point on, even if equity falls back to $102,000.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
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.
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.
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.
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.
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.
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