Prop Firm Rules Explained: Daily Loss, Max Drawdown and Consistency

Proprietary trading firms and funded trader programs let traders trade the firm's capital, or simulated capital, after passing an evaluation. Many traders fail these evaluations not because they lose money overall, but because they break a rule. Knowing the rules and tracking them precisely is half the challenge.

Common rules

Rules vary widely between firms, so always read the exact terms. Common types include:

Profit target

Reach a set profit, often a percentage of the account, to pass the evaluation.

Daily loss limit

Do not lose more than a set amount in a single day. Some firms measure it from the day's starting balance, others from the day's highest equity, and some include open positions. See daily loss limit.

Maximum drawdown

Do not let the account fall more than a set amount. Two common types:

• Static drawdown: measured from the starting balance.
• Trailing drawdown: measured from the highest balance or equity reached, so the limit moves up as you profit. Some versions trail on closed balance; others on intraday equity, including open profits.

Consistency rules

Some firms require that no single day makes up more than a set share of total profit. See consistency metrics.

Other rules

Minimum trading days, restrictions on trading around news, holding over weekends, or specific instruments.

Why traders fail

• Trailing drawdown on intraday equity. A trade that was up a lot and then reversed can move your limit up, then hit it.
• Oversizing to reach the target fast. Bigger size means bigger swings and a higher chance of hitting a limit. See risk of ruin.
• One bad day. Without a personal limit tighter than the firm's, one tilt session can end the account.

How to approach an evaluation

1. Set personal limits inside the firm's, for example half of the daily loss limit.
2. Size small. Passing slowly is better than failing fast.
3. Know exactly how drawdown is calculated, and track it.
4. Treat it as your normal trading. The habits you use to pass are the ones you will use when funded.

Track it in your journal

Keep the evaluation account separate in your journal so its statistics are not mixed with others. TradeThink supports multiple trading accounts, and its drawdown chart and calendar make it easy to see how close you came to each limit. Related: maximum drawdown.