Two prop firms can both advertise a “5% daily drawdown” and mean completely different things. One watches your closed results. The other watches your live equity, tick by tick. If you assume the wrong one, you can sit comfortably inside the limit on your own spreadsheet and still get your account closed.
This article untangles balance-based versus equity-based daily drawdown, shows you the same trading day under both rules, and gives you a practical way to find out which one applies to you. Keep the drawdown calculator open in another tab and you can test the examples yourself.
First, the basic definitions
Balance is the money in your account from closed trades (plus deposits and minus withdrawals). It changes only when a trade closes.
Equity is balance plus the floating profit or loss of every open position. It changes with every price tick.
Margin and free margin are separate ideas, and you can read about them on Investopedia’s margin page. For daily drawdown purposes, only balance and equity matter.
What a balance-based rule means
With a balance-based rule, the firm compares your balance (closed results) with the start-of-day balance. Open trades don’t create a breach on their own. The loss counts when the trade closes.
That sounds friendlier, and in some ways it is. You can ride out a short-term dip on an open position without being instantly failed. But it comes with a different risk: if a big floating loss eventually closes at the stop, the whole thing lands on you at once.
What an equity-based rule means
With an equity-based rule, your live equity is checked against the floor continuously. A floating loss counts the moment it appears. If a trade dips $3,000 against you for ten seconds and your equity touches the floor, that is a breach, even if the trade recovers a minute later and ends in profit.
This is stricter, and it’s far more common than beginners expect. It means the maximum loss you might see on a trade matters more than where you eventually close it.
The same day under both rules
Take a $100,000 account, a 5% daily limit and a start-of-day figure of $100,000, so the floor is $95,000.
- 09:00 You close a trade for −$1,000. Balance $99,000.
- 10:00 You open a position. It moves $4,500 against you. Your balance is still $99,000. Your equity is $94,500.
- 10:03 It bounces and you close at −$800. Balance $98,200.
| Rule | Lowest number checked | Result |
|---|---|---|
| Balance-based | $98,200 (after the close) | Safe, 36% of limit used |
| Equity-based | $94,500 (at 10:01) | Breached, below $95,000 |
Same trader. Same trades. Opposite outcome. That is why you have to know which rule applies before you size a single position.
Some firms use a hybrid
It gets messier. A few firms measure the daily loss from the higher of balance or equity at the start of the day. Others check equity but only count the loss against balance. A few apply different rules to the evaluation phase and the funded phase. The label on the marketing page is rarely enough, so read the full rulebook.
How to find out which one you have
- Search the rules for the words “equity” and “balance”. If equity appears in the daily loss definition, assume equity-based.
- Look for a worked example. The best firms include one with numbers.
- Check the dashboard. Many dashboards show a “daily loss” bar. Open a tiny trade and watch whether the bar moves while the trade is open.
- Ask support in writing. A clear written reply is worth a lot if a dispute ever comes up.
Why equity-based punishes wide stops
Under equity-based rules, your worst floating moment is what counts. A trade with a 100-pip stop can create a larger dip than a trade with a 20-pip stop at the same risk in dollars if you size it badly. Combined with several open trades, the dip can compound. If you want to see how stops, risk and size connect, work through position sizing for prop firm challenges.
How each rule changes your behaviour
Under a balance-based rule
You can hold a trade through noise, but you should still treat the stop as the real loss. Never move it further away to “give it room”. If a trade fails, the full loss lands in your balance.
Under an equity-based rule
Treat every open trade as if it has already lost its maximum. Add up the stop distance on all positions and compare it with your room left. If open risk is more than half of what remains, trim size or skip the trade.
What if I can’t tell?
Assume equity-based. It costs you very little to be careful, and it protects you in the worst case. The same instinct applies to anything unclear in the rulebook: take the stricter reading until the firm says otherwise.
Using the calculator for either rule
For an equity-based rule, enter your start-of-day equity and today’s total profit or loss including open trades. For a balance-based rule, enter only closed results. The tool will show the floor, the room left and the soft stop. And if you want to know how your floor behaves over several days, the guide on how to calculate max daily loss walks through it.
Related rules you should check at the same time
- The reset time, covered in daily drawdown reset time.
- Whether commissions and swaps count, in swaps and commissions.
- Whether the overall limit is static or trailing, in static vs trailing drawdown.
What about partial closes and hedges?
Partial closes move profit or loss from floating into your balance. Say you have two lots open and close one at a $600 loss. Your balance drops by $600 immediately, and the second lot keeps floating. Equity barely changes at that moment, but the balance-based view just moved. If you’re using a balance-based rule, partial closes are a way to bank small losses gradually; under an equity rule they change nothing about the total.
Hedging (holding a buy and a sell in the same instrument) can freeze your floating result but doesn’t remove costs. Some firms prohibit hedging outright, so check that before you try it as a way to “pause” a losing trade.
Trailing stops and equity
A trailing stop can protect profit, but it doesn’t change the way equity is measured. If your equity peaks, the stop follows, and a reversal closes the trade at a smaller gain than the peak. On a pure equity rule that’s fine for the daily limit. It matters more for trailing overall limits, where the peak raises your floor. We cover that in static versus trailing drawdown, and you can read the basics of a trailing stop separately.
Platform differences
MetaTrader, cTrader and proprietary dashboards all display equity and balance a little differently. Some include pending commissions, some show equity before swap posts, and some update the prop firm’s dashboard on a delay of several seconds. The practical lesson: your platform is for trading, the firm’s dashboard is the judge. If you notice a gap between the two, screenshot it and ask support what the official figure is.
When the dashboard and platform disagree
- Take a screenshot of both, with the time visible.
- Note which open positions and which costs were on the account.
- Send support a short message asking which figure the daily rule uses.
- Keep the reply. If the firm ever disputes a result, a clear record helps.
Why equity-based feels harsher psychologically
Under a balance rule, a drawdown is something that happens after you decide to close. Under an equity rule, a drawdown is something that happens to you while you watch. That difference matters. People under equity rules often close trades early to avoid a spike, then watch the price go on to hit their target. It’s a real cost, and it’s why many prefer to plan the worst floating moment in advance rather than react to it.
A checklist if your firm is equity-based
- Size each trade so its stop, if hit, still leaves at least 50% of the daily room.
- Add up all open stops. That total is your worst-case instant loss.
- Avoid opening several trades in correlated pairs at once.
- Keep stops where the setup is invalidated, not where the account is comfortable.
- Avoid holding through high-impact news without a plan.
If you want to see how these numbers behave in practice, enter them into the calculator and compare the room left at each step of your day.
Test yourself: three quick scenarios
Try these before you read the answers. Assume a $100,000 account, a 5% daily limit and a floor of $95,000.
Scenario A
You’re at $97,000 balance with an open trade floating −$2,500. Under an equity rule, where are you? Answer: equity is $94,500, which is below the floor. You have breached. Under a balance rule, you haven’t, yet.
Scenario B
You have a floating profit of $1,800 and a closed loss of $2,000 today. What’s your equity result? Answer: −$200 for the day, so equity is $99,800. The floating profit can disappear quickly, so don’t treat it as safety.
Scenario C
You close a trade at −$1,200 after it had dipped to −$3,000 intraday. Under which rule were you in danger? Answer: the equity rule. The −$3,000 dip would have used 60% of the limit at its worst moment, even though you only closed −$1,200.
If you got all three right, you understand the difference better than most people who buy challenges. If not, re-read the same-day example above and run the numbers through the calculator a couple of times.
What to write in your trading plan
Once you know which rule applies, put it in writing in one sentence at the top of your trading plan. For example: “My firm uses an equity-based daily limit of 5% of the initial balance, reset at 00:00 server time; my personal stop is 3.5%.” That single line prevents a surprising number of mistakes, because you read it every day instead of trusting memory.
Add two practical rules underneath. First, a maximum combined stop distance for all open trades. Second, a rule about when you’re allowed to move a stop (usually only to reduce risk, never to widen it). Both are small, boring and enormously effective under an equity-based rule, where every tick of a floating loss is judged in real time.
Mini glossary
Floating P/L: profit or loss on open trades. Realised P/L: profit or loss on closed trades. Margin: the deposit your broker holds to keep positions open. Free margin: equity minus margin used. None of these is the same as your daily loss, so keep them separate in your head.
One more practical tip
If you can, watch your equity line on a chart rather than only the number. Many platforms let you display an equity curve in real time, and a sharp downward spike is easier to notice visually than in a figure that changes every second. Pair it with a price alert set a little above your floor, so your phone buzzes before the wall, not after. Small tools like these turn a rule you’ve understood into a rule you actually follow.
Frequently asked questions
Which is more common, balance-based or equity-based?
Equity-based rules are very common, especially for the daily limit, but it varies. Don’t rely on a statistic, read your firm’s rules.
Does a floating profit help me?
Under equity-based rules, a floating profit raises your equity, so it cushions you. But it can vanish as quickly as it appeared, so don’t treat it as banked.
Do pending orders count?
Not until they fill. When several fill at once, the combined floating loss can appear suddenly.
Can the same firm use different rules for different account types?
Yes. Check the exact account type you’re buying, not just the firm’s general page.
The bottom line
Balance-based rules judge you on what you’ve closed. Equity-based rules judge you on what’s happening right now. Find out which one you have, assume equity if you can’t tell, and size your trades so the worst open moment still leaves room. Then read the prop firm max daily drawdown explained to see how this fits into the bigger picture, and learn more about the term itself in this free forex education resource.