Maximum drawdown is the floor your account cannot go below. Whether that floor stays where it started or follows you upward is the difference between static and trailing, and it changes the account you are trading more than any other published rule.
Static
A static drawdown is measured from your starting balance and stays there. On a $100,000 account with an 8% static drawdown, the floor is $92,000 on day one and it is still $92,000 in month four.
The consequence is that profit is genuinely banked. Take the account to $110,000 and you now have $18,000 of room beneath you rather than $8,000. Every dollar earned is a dollar of additional cushion, permanently.
Trailing
A trailing drawdown follows your equity up. The same 8%, trailing, starts at $92,000 — but take the account to $110,000 and the floor rises with it, to $101,200. Your room is always the same distance beneath your high-water mark. Futures accounts trail it once a day or during the day: EOD trailing drawdown, explained with an example.
This is the rule people misread, and the misreading is specific: they see the floor rise and think of it as a locked-in gain. It is the opposite. Under a trailing drawdown you never accumulate cushion. You are always the same single bad run from a breach as you were on day one, no matter how well the account has done.
Under a trailing drawdown you never bank a cushion. You are always the same single bad run from a breach as you were on day one.
- Equity
- Trailing floor, room $8,800
- Static floor, room $18,000
The detail that catches people
Trailing drawdowns differ in what they trail. Some follow closed balance, updating only when a trade is booked. Some follow floating equity, which means an open position moving in your favour raises the floor before you have realised anything — and if that position then gives the move back, the floor stays up while your equity comes down.
That combination has ended a lot of accounts that were, in the trader's own accounting, still profitable. If a plan states a trailing drawdown, find out which of the two it trails before you place a trade. It is printed in the trading rules.
How to trade each one
- Under static, front-load the risk. Early profit buys room that is yours for the life of the account, so the first stretch is where variance is cheapest to take.
- Under trailing, treat every day as day one, because in drawdown terms it is. Consistent size throughout beats a fast start followed by a large give-back.
- Under trailing on floating equity, be deliberate about letting winners run past your intended exit. The unrealised high raises the floor whether or not you ever collect it.
Neither type is a better deal in the abstract. A trailing drawdown often comes with a wider percentage, and the wider number can be worth more than the static behaviour depending on how you trade. Compare the pair, not the label.