Balance-Based Drawdown
Definition
Balance-based drawdown calculates losses based on your account balance (closed trades only), not including floating profits or losses from open positions. This method is more forgiving than equity-based drawdown.
With balance-based drawdown, only realized profits and losses affect your drawdown calculation. If your balance is $100,000 and you have an open trade showing -$5,000, your drawdown is still calculated from $100,000. The loss only counts when you close the position.
This gives traders more flexibility to hold positions through temporary drawdowns, as floating losses don't threaten the drawdown limit. However, this can also encourage bad habits like holding losing trades too long, hoping they'll recover.
Fewer prop firms use pure balance-based drawdown today because it can be exploited. Most have shifted to equity-based or hybrid methods. Always verify your firm's specific calculation method before trading. PropJournal supports all drawdown types and clearly displays which method is being used for your account.
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