The maximum overall drawdown sets the total amount your account can lose from its initial balance, including both open and closed trades. This rule is designed to maintain proper risk management and safeguard capital.
Here’s an example:
Imagine starting with a $100,000 account that has a 7% maximum overall loss limit.
Starting Balance: $100,000
Allowed Drawdown: 7% of $100,000 = $7,000
This means your account balance or equity must never drop below $93,000. If your balance or equity falls to or below that level at any point, it would trigger a violation of the drawdown rule, and the account would be considered failed.
In essence, the overall drawdown limit is always calculated from your starting balance, providing a clear risk boundary to help traders maintain disciplined and sustainable trading practices.