What is trailing drawdown?

What it means

With a static drawdown, a 10% limit on a $100,000 account means failure at $90,000 regardless of what happens in between. With a trailing one, reaching $105,000 moves the failure point to $95,000 — and it does not move back down when equity falls.

Why it matters

Some firms trail on closed balance and some on peak equity including open profit. The second is considerably harsher: a position that goes $3,000 in profit and returns to breakeven has raised your failure threshold by $3,000 without you realising a cent.

What this changes in practice

This interacts badly with any strategy that gives back open profit, which includes most trend-following. It is the specific rule most likely to fail an otherwise profitable automated system, and it must be modelled before running a bot on such an account rather than discovered afterwards.