Trailing Drawdown
Last updated
Last updated
The Trailing Drawdown (TD) feature is an advanced risk management tool designed to dynamically protect profits during a trading session. Unlike a fixed stop-loss, the TD feature adjusts its protection level as the session's profitability increases. This allows traders to lock in gains as they accumulate, while also providing a cushion against potential market reversals. The TD "trails" the highest profit level reached during the session, creating a dynamic safety net that moves upward with success.
The Trailing Drawdown feature has three key stages of operation:
Inactive Stage (Waiting): At the start of a trading session, or when disabled, the TD is dormant. It waits for the initial activation condition to be met.
Monitoring Stage (Tracking): This stage begins once the selected metric (either Session P&L or Net Liquidation Value) reaches or exceeds the "Minimum Profit Trigger." The TD then records the highest value reached by the chosen metric during the session (the "High Watermark"). The protection level is calculated by subtracting a specified amount (either a percentage or a fixed dollar amount) from this High Watermark.
Action Stage (Protecting): If, after the Monitoring Stage has begun, the chosen metric (Session P&L or Net Liq) falls below the calculated trailing protection level, the TD feature takes the predefined action. This action is designed to limit further losses and secure a portion of the accumulated gains. The TD resets after triggering, and will begin again at the Inactive Stage.
Session P&L: The total profit or loss for the account for the current trading session. It resets to zero at the start of each new trading session.
Net Liquidation Value (Net Liq): The current total value of the account if all positions were closed immediately at the current market prices. This includes both realized and unrealized profits and losses.
High Watermark: The highest value reached by the selected metric (Session P&L or Net Liq) after the Monitoring Stage has been activated. This value is continuously updated as the metric increases.
Trailing Protection Level: The dynamically calculated level below which the Action Stage is triggered. It's calculated as: High Watermark - Trailing Amount. The Trailing Amount is determined by the "Trail high watermark by..." setting.
The TD feature offers the following settings:
Enabled (On/Off Switch):
true (On): Activates the Trailing Drawdown feature.
false (Off): Deactivates the Trailing Drawdown feature. This is the default setting.
Based on... (Metric Selection):
Session P&L: The trailing drawdown will be based on the total profit and loss for the current trading session.
Net Liq: The trailing drawdown will be based on the account's Net Liquidation Value. This provides a more comprehensive view of the account's overall value, including unrealized gains and losses.
Net Liq does not have an activation trigger, it begins trailing the high watermark by the selected amount immediately. This functionality was chosen because many prop firms have strict, intraday trailing drawdown rules for disqualification and % of Net Liq needs to be monitored from wherever the intraday high exists.
Minimum Profit Trigger (Activation Point):
Purpose: This sets the level that the selected metric (Session P&L or Net Liq) must reach before the TD feature starts actively monitoring and trailing.
Units: Account's base currency (e.g., USD).
How to Use: Choose a value that represents a meaningful profit level at which you want protection to begin.
Important Note: Setting this to 0 is valid, meaning monitoring starts immediately.
Trail high watermark by... (Trailing Amount):
Purpose: This defines how the trailing protection level is calculated relative to the High Watermark.
Options:
X% (Percentage): The protection level will be X% below the High Watermark. For example, if set to 10%, and the High Watermark is $1000, the protection level will be 900 (1000 - 10% of $1000).
$X (Fixed Amount): The protection level will be $X below the High Watermark. For example, if set to $200, and the High Watermark is $1000, the protection level will be 800 (1000 - $200).
Units:
If set to percentage, then units are percentage.
If set to fixed amount, then units are Account's base currency.
Triggered Action (Action on Drawdown):
Purpose: This setting defines exactly what happens when the selected metric falls below trailing protection level (during the Action Stage).
Position Options:
Flatten: This is the most aggressive option. It immediately cancels all open orders and closes all open positions at the current market price. This effectively "locks in" the remaining P&L, as close to the threshold as possible (market conditions permitting).
Do nothing: This option means TD will trigger, but no automatic action will be taken. This is useful for testing or if you prefer to handle the situation manually.
Alert Options:
Block Signals: Block all further alerts, preventing them from executing.
Closing Only: Changes all current and future alerts to closing only.
Do nothing: Similar to above, no action is taken to affect future alerts to this account.
Let's illustrate the Trailing Drawdown feature with several examples:
Based on...: Session P&L
Minimum Profit Trigger: $200
Trail high watermark by...: 10%
Triggered Action: Flatten
The trader starts. TD is inactive.
Session P&L reaches $250. TD enters Monitoring. The High Watermark is now $250. The protection level is 225 (250 - 10% of $250).
P&L increases to $400. The High Watermark updates to $400. The protection level is now 360.00 (400 - 10% of $400).
The market reverses. P&L drops to $350. Session P&L is now below the current protection level (360.00).
TD triggers the "Flatten" action. The account is flattened, securing a profit near $350.
Based on...: Net Liq
Trail high watermark by...: $1,000
Triggered Action: Flatten
The trader starts. TD is immediately activated because the Net Liq option does not have a profit-based trigger.
The Net Liq reaches a $10,200 high. TD continues Monitoring. The protection level is now below $9,200 ($10,200 - $1,000).
Net Liq increases to $10,800.00 and the High Watermark updates to $10,800. The protection level is now $9,800.00 ($10,800 - $1,000).
Net Liq falls to $9,750. This is below the current protection level ($9,800).
TD triggers, and the account is flattened.
These scenarios highlight the flexibility of the Trailing Drawdown feature. By selecting between Session P&L and Net Liq, and by adjusting the trailing amount (percentage or fixed), traders can customize the protection to their preferred risk management approach.
