An idea for keeping well within your daily drawdown limit on a funded account

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If you’re in a funded program where you’re funded to trade an account, no doubt, you’ll experience an ongoing challenge and limitation of the strict daily drawdown.

I think it’s a good thing, that these restrictions are in place because it teaches the trader to practice proper risk management.

At the end of the day, you are trading with other people’s money, so they need a way to protect their capital in the best way possible.

And one of the ways of course through restricted daily drawdowns.

So I’m new to all this funded account business, and I’m learning more about it.

Think about it, it’s a golden opportunity for any trader who can prove their worth and get financially compensated.

You can trade accounts up to $1,000,000 and even more in some cases and you don’t need to put up your own capital.

Then when and if you profit, you get a cut of the profits. It’s a win-win for both parties.

However, it’s not easy, as you do need to meet certain requirements and trade under certain conditions and restrictions, one of which as I mentioned, is the daily drawdown limit.

The biggest requirement of them all is, that you HAVE to be good at trading and making profits:-).

If you’ve been trading for some time, you’ll come to realize that managing risk is one of the keys to success in trading.

And keeping within your daily drawdown limits should of course be part of your trading plan and strategy.

If you don’t, then, unfortunately, you won’t last much longer with your funded account, as you’ll hit your maximum overall drawdown limit, which could easily be hit in one day’s trading if you don’t plan your trades and risk properly.

With that said, I want to share a method that I worked out, which I think could work to keep a funded account well within the daily drawdown limits in a low-risk way.

  1. First, I will find out what my daily drawdown limit is. Let’s use a scenario of a $10,000 funded account, the daily drawdown limit is $500, which is equivalent to 5% of the account.
  2. Remember I said, low-risk way, so now I’m going to half that amount, which is $250. So now I’m going to set my “own” drawdown daily limit of $250.
  3.  Now I’ve got $250 worth of drawdown. Next, I’m going to look at my trading strategy and work out how much stop loss I’m prepared to take on each trade.
  4. I’ve determined that my strategy will have 60 pips set for stop loss on each trade. I’m going to be conservative and allow up to 60 pips of drawdown on each trade.
  5. 60 pips @ 0.01 micro-lot are $6.00 approximately.
  6. $250 / 6 = 41 (41.6 rounded)
  7. This now means,  I can trade 41 micro lots or 41 trades at 0.01, and should they all hit 60 pip drawdown on a worst-case scenario day, then my daily drawdown will be around $246!
  8. I also now know what lot sizes I need to trade as well. For example, if I want to trade mini lots, I could trade 4x 0.10. which of course is equivalent to 40 microlots.
  9. If for example, I know how many trades I’m going open at any one time, then I can simply divide 41 by the number of trades I’m likely to open, which will determine what lot size to use. 
  10. For example, if I want to have 7 trades open, and want to know what lot size I need to set, based on the daily drawdown limit of $250, the calculation would be 41 / 7 = 5 (rounded). So lot size for the 7 trades would be 0.05 on each trade. 

As you can see, this is a very conservative approach that could potentially significantly reduce your chances of hitting daily drawdown.

I’ve had some crazy painful, heart-wrenching drawdowns in the past and I’ve learned some lessons that cost me money!

That’s why going forward, I’m trying to stay disciplined and practice good risk management, because, seeing those negative big red numbers of your open trades on your MT4 mobile app, is not a nice thing to see!