EQUITY-BASED DRAWDOWN

EQUITY-BASED DRAWDOWN

Equity-based drawdown refers to the decrease in the value of your equity from its daily peak. It is an important risk management system that helps traders become more strategic, responsible, and disciplined. 

 

a)     What is equity?

·        Equity represents the total value of your trading account, including both your current balance and any unrealised profits (or potential losses from open positions).

·        This value fluctuates based on the performance of your active trades. 

 

b)    How Equity-Based drawdown works

·        Unlike balance-based drawdown (which only considers closed trades and is calculated at the end of the trading day), equity-based drawdown (EDD) is a dynamic metric that tracks price movements in real-time.

It takes into account both realised and unrealised profits and losses. 

 

How to calculate Equity-Based drawdown

Note your your Initial daily equity, and pay attention to your current equity too.

   - The initial daily equity is the starting value of your account each day (typically reset at 21:00 UTC). 

   - Current equity is the total value of your account at any given moment, fluctuating based on trade performance. 

Example of how to calculate:

Suppose you have an account balance of $10000 with no active trades. Your initial daily equity is $10,000.If you place a trade and experience an unrealised loss of -$150, your current equity drops to $9,850. 

EDD calculation:

Formula: EDD = (Initial equity - current equity) / Initial equity x 100

     In this case, EDD = (10,000 - 9,850) / 10,000 x 100 = 1.5%

    

As unrealised losses increase, your EDD also rises. This metric serves as an early warning system to help traders adjust their risk exposure or trading strategy before losses escalate. 

To protect your account, beginners should limit their daily risk to 0.2% – 1%.