III AdvancedWeek 9 • Lesson 25Duration: 50 min

DDP Prop Firm Drawdown Protection

The specific rules that keep you funded — compliance deep dive

Learning Objectives

•Understand FTMO-style drawdown rules and how they shape system design
•Know daily vs total drawdown limits and how to monitor them
•Master the buffer strategy for staying below hard thresholds
•Build a mental model for daily risk budgeting

Explain Like I'm 5

A prop firm gives you a funded account, but there's a catch: lose 5% in a day or 10% total and you're done. Account revoked. So you set your own limits lower than theirs — internal buffers that give you margin for error. Like setting your alarm 15 minutes early because you know you'll snooze once.

Think of It This Way

Prop firm limits are a cliff edge. You don't walk right up to it — you build a fence 10 feet back. Even if you trip, you don't go over. The internal limits are your fence.

1The Rules

Funded accounts typically have two hard limits: Daily loss limit (5%): Your account can't lose more than 5% from the start of each day. Resets daily. Doesn't matter if you're up 20% overall — if you lose 5% today, you're breached. Total loss limit (10%): Your account can't drop more than 10% from its initial balance. This never resets. Important details: • Daily limit is from balance at start of day, including unrealized PnL • Total limit is from initial balance, not high water mark • Both include open (unrealized) positions • If your account grew from

100K to

110K, your floor is still

90K — not

99K The daily limit is actually harder to manage because one bad day can end you even if you're otherwise profitable.

2The Buffer Strategy

The concept is straightforward: set internal limits with a safety gap below the hard limits. Your internal limits absorb slippage, gaps, and execution delays so the hard limits never get touched. Combined with DD-triggered risk scaling, the actual breach probability drops dramatically. The buffer handles execution risk. DD scaling handles systematic drawdown. Two layers of defense.

Hard Limits vs Internal Limits (Buffer Strategy)

3Daily Risk Budgeting

With a ~4.5R daily limit, you budget your risk throughout the day: • Multiple simultaneous trades at standard risk are fine — they rarely all lose at once • Realistic daily worst case: 5–8 trades hitting stops • That still leaves meaningful daily buffer The system monitors: • Intraday PnL — real-time profit/loss tracking • Open trade risk — sum of max risk on all open positions • Remaining capacity — how much risk is left today If daily loss reaches ~3R → stop opening new trades If daily loss reaches ~4R → start closing weakest positions If daily loss hits the limit → close everything immediately Graduated response. Defense in depth. You're never one bad fill away from a breach.

4Daily Risk Capacity on a Bad Day

This shows how daily risk capacity shrinks throughout a hypothetical bad day. Each losing trade eats into it. At 3R used, new trades stop. At 4R used, positions start getting closed. The key: none of this requires manual intervention. The system tracks it in real-time and acts accordingly.

Daily Risk Capacity Remaining (Bad Day Scenario)

5Common Breach Causes

I've seen funded accounts lost for preventable reasons. Here's the list: 1. Holding through news. NFP, FOMC, CPI — these can gap right through your stop. Either close before major releases or accept the gap risk. 2. No overnight risk limit. Positions held overnight are exposed to gap risk. Cap your overnight exposure. 3. Revenge trading. Losing 2R in the morning and doubling size to "get it back." This is the number one breach cause. 4. Ignoring unrealized losses. Open positions count. A floating -4% with one minute to market close is still a breach. 5. Correlated positions. Long EURUSD, GBPUSD, and AUDUSD simultaneously = triple USD exposure. One dollar move kills all three. The first rule of funded accounts: have a system, follow the system.

Key Formulas

Daily Risk Remaining

Risk capacity left = daily limit minus today's realized losses minus max risk on open positions. If this goes negative, stop trading immediately.

Hands-On Code

Compliance Monitor

python

class ComplianceMonitor:
    """Real-time compliance monitoring for funded accounts."""
    def __init__(self, initial_balance, daily_limit_r=4.5, total_limit_r=9.5):
        self.initial_balance = initial_balance
        self.daily_limit_r = daily_limit_r
        self.total_limit_r = total_limit_r
        self.daily_loss_r = 0.0
        self.total_loss_r = 0.0
    
    def can_trade(self):
        daily_left = self.daily_limit_r - self.daily_loss_r
        total_left = self.total_limit_r - self.total_loss_r
        
        if daily_left < 1.0:
            return False, f"DAILY: only {daily_left:.1f}R left"
        if total_left < 2.0:
            return False, f"TOTAL: only {total_left:.1f}R left"
        return True, "CLEAR"
    
    def record_trade(self, result_r):
        if result_r < 0:
            self.daily_loss_r += abs(result_r)
            self.total_loss_r += abs(result_r)
        else:
            self.total_loss_r = max(0, self.total_loss_r - result_r)

Continuous monitoring is not optional. The system stops trading automatically when approaching limits. This is the hard constraint everything else works within.

Knowledge Check

Q1.Your funded account grew from $100K to $110K. What is the total loss floor?

Assignment

Build a compliance monitor that tracks daily and total risk in real-time. Simulate a month of trades and verify it correctly stops trading when limits are approached.

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