WHAT IS Trailing Drawdown(TDD)?

Trailing Drawdown is a type of dynamic risk management tool. It sets a loss limit that moves up based on the unrealized profit and loss of an account. However, once it moves up, it does not decrease even if the unrealized profit and loss decline.

Let me explain with an example.

Trading Periods

Account Balance

Balance

Example

Scenario

Starting Account Balance: $50,000
Trailing Drawdown (TDD) Level: $47,500 (i.e., $2,500 below the starting balance)
TDD follows the highest unrealized profit but stops trailing at a locked level.

The Trailing Drawdown (TDD) moves up based on the highest point of unrealized profits. While continuous profits are ideal, the moment the account balance drops by the amount defined by the TDD from its peak, the rule is violated.

Since TDD is calculated based on unrealized profits, traders holding large positions for extended periods may find themselves in a situation where they are technically profitable but still violate the rule, leading to account suspension.