A Guide To Daily and Overall Drawdown Rules in Forex Prop Firms

If you’re thinking about getting into funded trading, you’ve probably heard about a prop firm by now.  

These firms give traders the chance to trade with larger amounts of capital without having to risk their own money. But the catch? You have to follow their risk management rules, like drawdown limits, to prove you can trade responsibly. 

One of the most important aspects of trading with a prop firm is fully understanding their drawdown limits because these rules are in place to protect both the trader and the firm from losing a lot of money. 

So, what exactly are daily and overall drawdown limits? And why do they matter so much? Let's break it down in a simple, no-nonsense way.

What is a ‘Drawdown’ in Forex Trading?

Before explaining specific limits, let’s first actually define drawdown. In forex trading, a drawdown is a dip in a trader’s account balance when it drops from its highest point to its lowest before it starts going up again. 

It’s a key indicator for assessing how a trader deals with losses and manages risk. 

There are two primary types of drawdown limits in prop trading firms:

1. Daily Drawdown Limit – The maximum amount you can lose in a single trading day.

2. Overall Drawdown Limit – The maximum loss allowed over the entire trading period.

Each prop firm has its own set of rules and percentages for these limits, so make sure you’re familiar with them before you dive into trading. 

Understanding the Daily Drawdown Limit

Think of the daily drawdown limit like a built-in safety net, it’s the maximum amount you’re allowed to lose in a day before the firm gives you a firm ‘Nope, not today.’  

It’s either a set percentage or a dollar amount and once you hit it, it’s time to step away and regroup. Your account usually gets closed for the day, and in some cases, you may lose your funded account entirely. 

Why is There a Daily Drawdown Limit?

• Risk Management:
  No firm wants a trader going full ‘YOLO’ and wiping out their account in a single day. That’s bad for everyone. So, they put some guardrails in place to keep things (and your balance) from crashing and burning.

• Discipline Enforcement:
  It’s a gentle (but firm) nudge to trade smart and not gamble your account away. Risk management isn’t just a suggestion—it’s the difference between lasting in the game or blowing up your account.

• Consistency Over Gambling:
  Stops you from going full-on emotional rollercoaster mode—no panic selling, no revenge trading, no ‘maybe if I just double down’ moments. Just smart, controlled moves that keep your account (and sanity) intact.

For example, if a prop firm has a 5% daily drawdown rule and your funded account is $100,000, the maximum you can lose in a single day is $5,000. If you reach this point, you’ll be locked out of trading until the next day.

Understanding the Overall Drawdown Limit

The overall drawdown limit (aka max drawdown) is your ‘too far, buddy’ line. It’s the total percentage of losses you can take before the firm pulls the plug on your funded account. Stay above it, and you’re still in the game!

This is usually a larger percentage than the daily drawdown, and it’s calculated over the life of your account.

Why is There an Overall Drawdown Limit?

• Protecting the Firm's Capital:
  Let’s be real—no firm wants a trader draining their funds like it’s an all-you-can-lose buffet. This rule makes sure you don’t take too big of a hit and keeps everyone (including your account) in the game.

• Encouraging Longevity:
  Trade smart, manage risk, and your account gets to stick around for the long haul. It’s like a VIP pass—but only for those who don’t gamble it all away.

• Filtering Out High-Risk Traders:
  Only the disciplined survive. If you can keep your cool and trade with a plan, your account lives to see another day. If not… well, let’s just say the market has a way of showing no mercy.

For instance, if the firm sets a 10% overall drawdown on a $100,000 account, your account will be closed if your balance drops to $90,000. Unlike the daily drawdown, this is measured over time rather than per trading session.

How to Stay Within Drawdown Limits?

Now that you know what daily and overall drawdown limits are, here are some tips to ensure you don’t hit them:

1. Use Proper Risk Management

• Stick to a risk-per-trade rule (e.g., 1-2% per trade).

• Avoid over-leveraging and over-trading.

2. Set Stop Losses on Every Trade

• Never trade without a stop loss.

• Adjust stops according to market conditions.

3. Have a Trading Plan

• Define entry and exit strategies.

• Stick to your plan even when emotions kick in.

4. Trade with a Calm Mind

• Avoid revenge trading after losses.

• Take breaks when needed to avoid emotional trading.

5. Choose a Prop Firm with Favorable Rules

Not all prop trading firms have the same drawdown policies. Some are better than FTMO, offering more flexible limits or trailing drawdown calculations that benefit traders.

The Bottom Line

Knowing your daily and overall drawdown limits is essential when trading with a prop firm. These rules aren’t there to hold you back—they’re in place to help you trade smarter and stay in the game for the long run.

The best way to stay funded and profitable is by managing risk properly and sticking to a solid trading plan.

Before picking a prop firm, make sure to take a close look at their drawdown policies. If you want a firm with fair rules and great opportunities, check out TopOneTrader’s options to find the perfect match for your trading style.

Stay disciplined, respect the limits, and you’ll have a long and profitable trading career!