Balance-Based vs Equity-Based Drawdown — The Hidden Difference

Here's a situation that plays out constantly in prop trading communities. A trader opens a position, the market moves against them, and their account is terminated — even though they hadn't closed a single losing trade.

They weren't reckless. They weren't ignoring their limits. They just didn't know that at their firm, open trades count.

This is the balance-based vs equity-based distinction. It's the least visible difference in prop firm drawdown rules, and one of the most consequential.

With balance-based drawdown, the firm measures your loss from your closed balance only. A trade sitting open at a floating loss has no effect on your drawdown calculation until you close it.

On a $100,000 account with a 5% daily limit ($5,000):

You open a trade. It moves $4,800 against you. Your screen shows you down $4,800 on the day.

Your balance is still $100,000. Nothing is closed. You're not in breach. You can hold the trade, cut it early, or wait for it to recover — the clock on your daily limit only starts ticking from closed losses.

For swing traders and overnight position holders, this is a meaningful structural advantage. Normal intraday and overnight volatility doesn't threaten the account.

With equity-based drawdown, the firm measures your full equity — your balance plus or minus every open position in real time. A floating loss is already reducing your available daily buffer, even before you've clicked close.

Same scenario: $100,000 account, 5% daily limit.

Your trade moves $5,001 against you at 2:47pm. Your equity touches $94,999.

Account terminated — even though you planned to hold, even though your closed balance is untouched, even though the trade might have recovered within the hour.

FTMO uses equity-based daily drawdown. It's why experienced FTMO traders consistently recommend sizing positions so that even a full stop-out doesn't bring floating losses close to the daily limit. One standard rule of thumb among funded FTMO traders: risk no more than 1% per trade so that a full losing day of 4–5 trades still keeps you well inside the 5% ceiling.

Two firms advertise "5% daily drawdown." At a balance-based firm, that means you can have $4,999 in floating losses on an open trade and still be fine. At an equity-based firm, that $4,999 floating loss is already 99.98% of your daily limit — and the trade is still open.

The percentage is the same. The actual risk exposure is completely different.

Look for the word "equity" in the drawdown description. If the firm specifies that the daily limit applies to equity — including open positions — you're on equity-based. If they specify "balance" or "closed positions," you're on balance-based. If the description is unclear, check the FAQ or contact support before you start trading. It's worth knowing before you size your first position.