Understanding The Maximum Drawdown Limit Level
This a floor to simply protect T4TCapital’s fund! Breach this and the account is closed. It is therefore very important to understand how the Maximum Drawdown works.
How the Maximum Drawdown Limit Level is calculated?
Similar to the Weekly Loss Limit Level it is a percentage of the Initial Trading Account Size. In the case of the Maximum Drawdown Level Limit it is 4% of the Initial Trading Account Size. Unlike the Weekly Loss Limit Level it is exactly the same for the Practical Assessment and the Live Account.
The calculation is as follows:
Maximum Drawdown Limit Level = High Water Mark – (4% x Intial Trading Account Size)
Lets take a look at an example using the $100,000 account.
Starting Account Balance = $100,000
Maximum Drawdown Limit Level = $100,000 – $4,000 = $96,000
This is the Maximum Drawdown Limit Level at the beginning of the week before any trading.
During this week of trading the trader made $2000 and then lost $500 to finish the week with an account balance of $101,500. The highest account balance (or the High Water Mark) was $102,000
High Water Mark (the highest the account balance has been) = $102,000
Maximum Drawdown Limit Level = $102,000 – $4,000 = $98,000
It is important to note that the Maximum Drawdown Limit Level trails the High Water Mark (in the case of this example the $100,000 acct by $4,000 UNTIL it reaches the Initial Trading Account Size (in this case the $100,000 account) where it remans at that level from now on and for the life of the account. If the trader grew their account to $300,000 the Maximum Drawdown Limit Level would remain at $100,000.
If you have read the article about the Weekly Loss Limit Level you will notice that as soon as you achieve an account balance of $104,000 and above you only need to consider the Weekly Loss Limit.
Breach of the Maximum Drawdown Limit Level in both the Practical Assessment and the Live Account
Should you breach this limit in the Practical Assessment your account will be disabled and have the opportunity to reset and start again. Should you breach the limit in the Live Trading Account then your account will be closed. There is no reset on the live trading account as you will have lost T4TCapital 4% of it Trading Account. You may retake the Practical Assessment again should you wish to show that you now fully understand the limits.
Normally your Maximum Drawdown Limit Level lies below the Weekly Loss Limit Level. In this case your available risk is the difference between the Account Balance and the value of the Weekly Loss Limit Level. However should the trader have a fantastic first week and on the $100,000 account makes $8,000 and has an account balance of $108,000 then the Maximum Drawdown Limit Level has risen to and remained static at $100,000 whilst your Weekly Loss Limit Level has remained at $98,000. You can see the Maximum Drawdown Limit Level is now the limiting factor so your Available Risk is now $108,000 – $100,000 = $8,000. It is not very common for this to happen however this illustrates the power of the limits and their ability to control risk and protect profits at the same time.
In short The Maximum Drawdown Limit Level is both a fund protector and profit protector. For those already thinking about this. If you are trading the live account and you hit the Maximum Drawdown Limit Level but that level was say $104,000 on a $100,000 trading account, yes your account will be closed however you will still get paid your share of the $4000!