How do you calculate Daily Drawdown?

Understanding Daily Drawdown Calculation
The daily drawdown is a critical metric in trading competitions as it dictates the maximum allowable loss for a given day. Here’s how it works:

Calculation Based on Balance:

The daily drawdown is typically calculated based on the balance at the start of each day, which begins at 5 PM EST. This means that if you start the day with a certain balance, the drawdown limit is calculated off that balance.

Example with a Percentage Limit:

Starting Balance: $100,000
Daily Drawdown Limit: 8% (as specified in the competition)
Maximum Daily Loss: $8,000 (8% of $100,000)
So, if your balance starts at $100,000, you are allowed to lose up to $8,000 throughout the day before hitting your daily drawdown limit. If your equity falls by this amount, you will be disqualified or locked out of the competition for breaching the limit.

Static vs. Dynamic Drawdown Limits:

Static Drawdown:

In some competitions, the daily drawdown is static. This means that no matter how much your balance grows during the day, the maximum loss is fixed.

Example: If you start with $100,000 and the daily drawdown limit is 8% ($8,000), then even if your balance increases to $200,000 during the day, your drawdown limit remains at $8,000. So, you cannot lose more than $8,000, regardless of any gains.
Dynamic Drawdown:
In other competitions, the daily drawdown may be dynamic and recalculated based on the current balance.

Example: If your balance increases to $200,000 during the day, the drawdown limit would be recalculated to 8% of $200,000, which equals $16,000.

Key Takeaways:

Always check the competition rules to see whether the drawdown limit is static or dynamic.
The daily drawdown limit is calculated based on your balance at 5 PM EST, and it’s essential to monitor your equity carefully to avoid breaching this limit.
If you hit your daily drawdown, you will be disqualified from the competition, so managing risk is critical.