What is retracement in investment trading? What is the difference between a retracement and a Prop Firm retracement?
"Retracement" is the amount of "loss" or "reduction in profit" that occurs when you fall from the highest to the lowest level of your account, either in your personal account or in your personal account. Prop Firm Exam AccountAll of them.
Funding withdrawals are only consideredFunding Factors, a measure of how much the funds have fallen back, for example:
A $100 retracement of 30% ($30) means that the current funding has shrunk by $30 from the maximum of $100 and the current funding is $70.
As to whether the $30 is a "loss" or a "reduction in profit", it is important to consider not only the account itself, but also whether the extra $30 is a "loss" or a "reduction in profit".Human Factors (Depends on how much you originally came up with for the cost):
- Cost is 100:100 retracement of $30 = $30 loss
- Cost is 50:100 Retracement of $30 = Profit reduction of $30
So, the retracement only looks at the state of your capital back, and has to be looked at in isolation from the cost of what you put in, in order to understand the retracement objectively.
With the above concepts in mind, incorporatingTime factorIn addition, it is possible to measure the return of funds over a period of time.
The concept of the time factor is clearer for personal account transactions, but for Prop Firm Trading EvaluationAspects may start to blur, so I've switched to 'cycles' to express the role of the time factor in trading exams.
Pullbacks in Prop Firm Trading EvaluationThe difference between "daily retracement" and "maximum retracement" is the "period":
- Daily Retracement: Measurement of capital retracement on a "daily" basis.
- Maximum retracement: a measure of the return of funds in terms of the "overall account" cycle
The reason for the difference in the unit of measurement of the fallback of funds and the simple time factor of individual accounts is due to the design of the mechanism of the Prop Firm's appraisal model: the loss of the account as a whole is their maximum risk, and for them, the risk is controllable, and it is a business to be done.
Of course, the overall account loss can then set a "threshold", how much the rate of retracement is in their own want to bear and the user acceptable range of measurements, weighing down with the product specification design there are nine hundred and eighty-one combinations:
- A Mode Daily Retracement 4%, Maximum Retracement 8%
- B Mode Daily Retracement 5%, Maximum Retracement 10%
- …
And that's not all, retracement ratios are just the surface, when we step into the Prop Firm trading exam arena, we play the game of capital curves, so there are more changes in the retracement "calculation".
Retraction of Funds Simplified Calculator
Before we get into the complexity of the calculations, to give you a sense of the relationship between retracements and returns, I've designed a simple calculator that you can try out, but it doesn't incorporate the idea of net worth or balance, so you can have as much money as you want.
You can enter the values in the Maximum Funds and Current Funds fields to get the results on the right: retracement magnitude, required rate of return.
For example:
- Maximum funding: $100,000 → Current funding: $80,000
Withdrawal rate = 20%, required return rate = 25%
- Maximum Funding: $100,000 → Current Funding: $50,000
Withdrawal rate = 50%, required return rate = 100%
The required rate of return is the rate of return needed to recover from the current capital to the maximum capital, and the larger the retracement, the higher the required rate of return. For example, a retracement of 50% would require a return of 100% to return to capital.
Through the calculator, you can simply understand the importance of retracement for risk management, especially in trading exams, the more you retrace, to fight back instead of the more you have to, more or less will affect the Prop Firm challenge to achieve the target rate of profitability.
- In addition to the retracement rate and the rate of return, in practice, we will still consider the parameters from the decision-making process to the results, such as the single risk tolerance, profit/loss ratio, and win rate, and then evaluate whether the retracement is in line with our own trading attributes, rather than just pursuing the minimization of retracement.
Prop Firm Daily Drawdown
What is the daily retracement?
In Prop Firm trading exam rules, the maximum amount of money that can be lost each day is the bottom line of risk control to be observed each day.
For day traders, the daily retracement may be more important than the maximum retracement.
The difference between using your own account for risk control is that you will lose your exam account, your official account, as soon as you hit the daily risk control or exceed the limit of the rule.
The "Daily Retracement" measures "how bad" your account funds are each day, as long as they are bad enough that you can continue to operate your account without violating the law.
The daily retracement is not a fixed value, it depends on each Prop Firm account type regulations, as long as the daily retracement touches the required level, are considered disqualified.
Retracement is also a trading candidate's hood, many types make most traders count to the headache, of course, the candidate directly look at the account real-time data is the most accurate, but you still must understand its logic, in order not to step on the same mine.
What are the types of daily retracements?
Daily retracement light name, each Prop Firm will have their own naming, such as daily starting balance can be “Start of Day Balance”, “EOD Balance”, “Start Balance”, although the meaning is similar, but different name is enough headache. "Start Balance", although the meaning is similar, but the different names are enough to cause a headache.
I've compiled a list of how the Prop Firm calculates daily retracements in the market, and they can be broadly categorized into two main types (plus tips):
- Watch the balance (Balanced-Based)
- Max(Balance, Equity)
1. Watch the balance (Balanced-Based)
From the calculation point of view, depending on the starting point of calculation, there are "Initial Account Balance" and "Daily Starting Balance", which only look at the balance but not the net value.
- Initial Balance of AccountsFor example, if the account size is 100K, then it will be calculated on the basis of a 100K capital level.
⭢ For example:FTMO It is the initial account balance that is used to calculate the daily retracement.
- Start Balance per day: Calculated using a daily starting balance, so the calculation level is reset every day.
⭢ e.g. Pipfarm is calculated using daily starting balance
You may also see “EOD (End of Day)” in the Futures Market.”
Sometimes you'll see something like "Static" labeled on the daily retracement, but it's not enough to just look at the name, you need to confirm the calculation so you don't get caught up in the static sign (most people like the static rule, but not so much the Starting Balance of the Day calculation).
2. Max(Balance, Equity)
Compare the balance to the net worth and use whichever is higher to calculate the daily retracement.
The difference between Balance and Equity is whether or not there are open orders across the day. If there are no orders, look at the Balance; if there are orders, look at the Equity and the Balance, and then compare the Starting Balance to the Starting Equity for that day.
Orders across days are calculated based on the higher of the starting balance or the starting net value of the day, if:
- Starting balance > Starting net value: Calculated using starting balance
- Starting balance < Starting net value: calculated using starting net value
⭢ For example:Funding Pips It's in all modes.
How to calculate the daily retracement?
1. Watch the balance (Balanced-Based)
⭢ Formula: "Initial Account Balance" x Daily Retracement Ratio
Assuming a 100K account with a daily retracement of 5%, for example, using the "Initial Account Balance" of $100,000 as the basis for calculation, and multiplying it with the daily retracement ratio to get the value of 5,000 daily retracement space.
Assuming we reach the third day, to further calculate the daily default level (DSL), deduct 5,000 from the starting balance of 104,000 to get 99,000.
Because the initial account balance is used as the basis for calculation, the margin of loss is fixed regardless of the daily change in the starting balance.
⭢ Formula: "Daily Starting Balance" x Daily Retracement Ratio
The same 100K account with daily retracement 5%, for example, using the "starting balance of the day" as the basis for calculation, assuming the starting balance of the day of operation is 104,000, and multiplying with the daily retracement ratio, we get the value of the daily retracement space of 5,200.
Further calculate the daily default level (DSL) by subtracting 5,200 from the starting balance of 104,000 for the day to get 98,800.
Because the calculation is based on the daily starting balance, it only looks at the level of "closed positions" before the daily reset time and does not take into account the effect of net worth (open float).
2. Max(Balance, Equity)
Max (Balance, Equity) - Compare Balance or Equity, the higher of which is used to calculate the daily retracement.
⭢ Formula: "Higher of Daily Starting Balance or Net Worth" x Daily Pullback Ratio
The second category takes into account the net worth which affects the daily retracement calculation.
100K account, daily retracement 5% for example, if there is an order across the day, and the daily reset time starts:
- Starting balance of the day: 104,000
- Starting Net Worth for the day: 104,500
Since Starting NAV > Starting Balance, use Starting NAV to calculate the daily retracement and multiply it with the daily retracement ratio to get 5,225.
Calculate the daily default level (DSL) by deducting 5,225 from the net starting value of 104,500 to get 99,275.
This calculation involves comparing the starting balance or starting net worth of each day, whichever is higher, and any difference in the starting balance or net worth affects the range of loss margins available on that day.
When does the daily retracement reset?
Since it is "daily" there will be a daily recalculation of the starting point of the retracement, this point of time each Prop Firm may be due to their own country / region, and have their own reset time, so to the one you use the back office or common problems, you can confirm the reset time.
Most of the daily retracement reset time falls around 6am Taipei time (UTC+8), if you do not have a cross-day position, basically less likely to be affected, if you do have a position, then the starting time to start, it applies to the calculation of the retracement of the various ways, but if it is not too far from the stepping on the line is not too extreme, it is also not too much need to pay attention to it all the time.
⭢ For example:FTMO 00:00 CE(S)T,E8 Funding 00:00 UTC+2,The5%ers 00:00 GMT+2
What happens when the daily retracement is reached?
Regarding the daily retracement rule, it is almost a necessary restriction for the Prop Firm trading exam, but there are also Prop Firm or account models without daily retracement restrictions.
However, when an account does hit the daily retracement limit, there are 2 possible outcomes:
- Hard (Hard)Loss of Account (Mostly Hard Breaches)
- Soft Violation (Soft): Suspend trading (to give you a reprieve), for example:E8 Markets E8 Signature Mode
Hard violations are usually predominant, and while the intent of offering soft violations is to be candidate friendly, they are not unlimited to let you step on them.
The applicability of the soft violation only exists in the Challenge stage, and usually only hard violation is available in the Funded stage, where you have to retake the exam if you have stepped on the limit (with a few exceptions like The5ers Bootcamp mode).
In addition, the daily retracement and the maximum retracement are independent of each other. You can either not violate the daily retracement and end up violating the maximum retracement because the account fails to make a profit, or you can not violate the maximum retracement but one day just violate the daily retracement and get out of the market.
Prop Firm Max Drawdown
What is the maximum retracement?
When it comes to maximum retracement, it is a key role in overall account risk control in the Prop Firm Trading Exam Rules.
The difference with the normal risk control of trading with your own account is that when you hit the maximum risk control of the rules or exceed the limit, you will immediately lose your exam account, official account, lose your exam fee and account.
The importance of maximum retracement cannot be ignored for long term cycle traders.
The "maximum retracement" measures "how bad" your overall account funds have fallen, and as long as it's not so bad that you don't violate the rules, you can continue to operate your account, plus most Prop Firms have now eliminated the time limit on challenges.For traders, it's more important to care about "will" or "won't" step on the line.。
Maximum retracement is not a fixed value, can also be dynamic changes, depending on the individual Prop Firm account type requirements, when the account loss retracement touches the "failed" level, immediately failed.
What are the types of maximum retracements?
Prop Firm Maximum Drawdowns are named differently but have the same meaning, I've organized there are 2 types of Max Drawdowns:
- Static = Fixed = Absolute. A fixed rate or amount calculated from initial account funds.
⭢ For example:FTMO Use Static,City Traders Imperium Absolute is used in 2-step mode, but it all refers to the same thing.
- [Type 2] Trailing = Relative = Smart, or other synonyms. This is a dynamic type of retracement where the maximum retracement is adjusted upwards as soon as the funds reach a new high level in the account.
⭢ For example:E8 Markets E8 One mode with Dynamic or Signature mode with EOD (End of Day),Funded Trading Plus There are four challenge modes using Relative, but they all refer to the same thing
How to calculate the maximum retracement?
1. Category I maximum retracement - fixed retracement
The first type of retracement is a fixed rate or amount calculation and is the type that most traders prefer.
A fixed loss margin is calculated from the initial account amount. For a 100K account, 10% has a maximum retracement margin of 10,000 and a violation level of 90,000.
Then it is safe not to step on the violation level of the balance or net worth at this time, and if the more you earn, then the room for maximum retracement will increase.
The more money you make, the more room for a maximum retracement of what you were given plus what you made.
2. Type II Maximum Retracement - Dynamic Retracement
The second type of retracement, such as Trailing, Relative, and Smart, all refer to the same thing, i.e., "dynamically changing" types of retracements.
This type of retracement is designed to help traders preserve the profits they have made and not let too much money back into the market.
In the second type of retracement, the focus is on"Highest Water Mark (HWM)"This is the level at which the account is funded at record highs, based on the balance or net worth.
The calculation results in a dynamic loss margin, whereby as long as the balance or net worth continues to increase, the default level will keep going up without reaching the initial balance of the account.
Simply put, as long as there is a profit to be made, the level of non-compliance will continue to rise, as if it is "tracking" your profit, and the distance between you is the maximum retracement.
In the case of Type II dynamic retracements, typically CFD Prop Firm falls into the category of maximum loss level that is settled daily.
⭢ For example:E8 Markets Signature Mode with EOD (End of Day Balance)
A few CFD Prop Firms or Futures Prop Firms calculate a new Maximum Loss Limit (MLL) on-the-fly, which is a more dynamic type.
⭢ For example:E8 Markets E8 One mode with Dynamic instant retracement calculation
Maximum retracement - lock point
If the Maximum Level is raised to the same ratio as the Maximum Retracement (meaning that it earns a ratio equal to the Maximum Retracement), the Non-Compliance Level will rise to a "lock point" where it will no longer move.
For example, for a 100K account, the maximum retracement rate is 8%, so the balance or net worth is 8%, the balance or net worth of the account comes to 108,000, and the non-compliance level is fixed at 100,000 and will not be changed.
Subsequent accounts, whether they make or lose money, will remain locked at the initial account balance.
The second type of retracement is more dynamic than the first type of retracement, except that there are more variations in the maximum water level and the violation level.
This has caused most traders to quietly lose their accounts without even realizing it.
Maximum Retraction - Highest Water Mark (HWM)
If the Maximum Level is raised to the same ratio as the Maximum Retracement (indicating that it earns the same ratio as the Maximum Retracement), the Non-Compliance Level will rise to a "lock point" and will not move again.
For example, for a 100K account, the maximum retracement rate is 8%, so the balance or net worth is 8%, the balance or net worth of the account comes to 108,000, and the non-compliance level is fixed at 100,000 and will not be changed.
Subsequent accounts, whether they make or lose money, will remain locked at the initial account balance.
The second type of retracement is more dynamic than the first type of retracement, except that there are more variations in the maximum water level and the violation level.
The Highest Water Mark (HWM) is based on the watermark of the account's Record High Funding and can be calculated based on either Balance (B) or Net Worth (E).
- Balance-based HWM: only closed positions are counted and not affected by open positions.
⭢ For example:E8 Markets E8 One/Signature mode,City Traders Imperium 1-step,Funded Trading Plus Master/Experienced mode, etc.
- Equity-based HWM (Equity-based): Tracking based on the highest net worth of the account, which calculates the profit and loss of open positions and adjusts upwards the default level.
⭢ For example:FundingPips FundingPips Zero mode
What happens when the maximum retracement is reached?
Reach the maximum retracement usually the system will automatically help you close all the positions, you will directly lose the account, the operation of the account qualification, there will not be like the daily retracement there is room for flexibility.That is to say, they are all "hard violations".。
Failure at different stages has different meanings:
- Failure in Challenge Phase: Loss of Exam Fee (-$B)
- Official Account Failure: Flat or Earnings ($0/+$A)
Most people who fail at the challenge stage will want to re-take the challenge, buy a new account, and easily fall into the Prop Firm's trap (and even offer retake discounts to entice you to enroll again).
Another result, if you usehedgeOperation Prop Firm:
- Challenge Stage Fail: Earn Money ($A)
- Official Account Failure: Earn Money (>$A)
This is the method that allows people who cannot pass the challenge but still make a profit, even if they step on the hard violation of the maximum retracement, they can still make a profit from it, and at this point, they have to choose to retake the exam so that they do not remain limited to the trap of losing the exam fee.
If you want to learn tips on how to do this, you can find them on theThis pageLearn more.
Prop Firm Retracement Difficulties?
All of the above retracement calculations are described as "principles", but you don't really need to calculate the retracement after every operation. Most Prop Firms now provide data in the back office such as real-time capital levels, retracement caps, daily reset times, etc., which themselves apply the principles and limitations of their respective calculations.
However, I have really encountered cases where the official website description and the backend data are not consistent, and only after responding to the customer service was it corrected.
To illustrate, the principle of calculation and the data presented are two different things. Although very few people in the market are like me to verify, as long as you understand the principle, you will not be disadvantaged if you have to verify and defend your rights later on.
What is the best type of retracement for Prop Firm?
If you look into it, you will find that each company says something different, the names are different, the descriptions are ambiguous, the rules are hard to understand, and in the past I have stepped into a lot of retracement pits. I've stepped into a lot of retracement pits in the past. This has also caused most traders to quietly lose their accounts without even realizing it.
As a matter of business logic, the type of retracement that is "good" for a trader is priced higher than the type of retracement that is "bad".
According to a Prop Firm survey, more than half (54%) of traders do not like to track retracements because dynamic retracements make it easy for traders to break the rules, suggesting that this is the type of retracement to avoid if you can, and it is the type of retracement that is not easy to live with.
"Better than" = Simple to calculate, not easy to step on the line type of retracement:
- Daily Retracement: Static, Initial Balance of the account
- Maximum retracement: Category I
Picking from such a mix is a relatively stable option for traders aiming for a pass. However, don't forget that in addition to retracement limits, there are rules such as consistency and profit targeting waiting for you.
"Would you rather buy the friendly retracement type at a more expensive price and accept other restrictions that are more unfavorable to your account? Or would you prefer to forgo choosing a friendly retracement type and accept other more lenient restrictions?"
Although the situation is not necessarily bipolar, just to remind you in addition to the type of retracement, other rules and restrictions are also you need to consider, and also need to measure their own situation (trading ability), you will naturally have a weighted allocation of certain rules and restrictions, choose which model will maximize their own interests, this is the direction you should think about!
However, if you have a high allocation weighting in the retracement type, then hopefully this article will help you in the clarification and decision making process.
By the way, if you read the article, understand the different types and principles of calculation, but still do not know where to start.
I have prepared a list which covers 10 CFD Prop Firms, 40 account models each with their own daily retracement/maximum retracement party count, type, calculation, which will definitely save you a lot of time to understand the complicated terms and calculations of daily retracement type and maximum retracement in one go.
After all, each Prop Firm may have its own rules and regulations on retracements, calculations, and terminology.
If you need it, get it for free below⬇!
p.s. The companies or account models in the list may vary due to the internal decisions of the respective companies, please refer to the official announcement as the main guideline, this list is just to give you a reference point to understand the rules of retracement.
Risk Warning:
Forex and Contract for Difference (CFD) margin trading carries a high level of risk and may not be suitable for everyone. The high degree of leverage can work against you as well as for you. Before deciding to trade forex and CFDs, you should carefully consider your trading objectives, level of experience, and risk appetite. You may sustain a loss of some or all of your initial investment. You should be aware of all the risks associated with forex and CFD trading, and seek advice from an independent financial advisor if you have any doubts.
Please note that before deciding to purchase any retail proprietary trading firm challenge, you should carefully consider the company's challenge trading objectives, drawdown risks, and various rules. You may lose part or all of your initial funds used to purchase the challenge account.
Some proprietary trading firms (Prop Firms) provide all accounts to clients with virtual funds in simulated accounts. All trades are conducted only in a simulated environment. For details, please refer to the announcements on the official websites of each prop firm.
