At Liquid Markets, we believe that managing risk is as crucial as mastering strategy. One way we ensure that traders on our platform maintain robust risk management practices is through dynamic drawdown calculations. These metrics are not just about limiting losses; they are about ensuring fair evaluations, especially in diverse trading environments, from demo stages to live accounts. This is all seamlessly managed by our cutting-edge AI risk management system, .lacma.

.lacma is designed to enforce equity drawdown rules transparently and effectively, protecting both traders and the firm. By tailoring drawdown rules to trading stages and strategies, we create an environment that balances opportunity with responsibility. Let’s delve into the key drawdown types, their purpose, and how they can impact your trading journey.

Drawdown Calculations: Understanding the Metrics

1. Equity% – Initial.Balance

This method calculates drawdown as a percentage of the initial balance when the trading period began. It offers a straightforward measure, keeping your losses relative to your starting point.

Example:
You start with £10,000. Your equity drops to £8,000. The drawdown is:

Drawdown=(10,000−8,000)10,000×100=20%\text{Drawdown} = \frac{(10,000 – 8,000)}{10,000} \times 100 = 20\%

This metric is ideal for evaluating overall performance against your original capital.

2. Equity% – Yesterdays.Balance

This method compares your current equity to the balance from the end of the previous trading day. It’s particularly effective in fast-moving markets, as it adjusts daily to your trading progress.

Example:
Your balance was £9,000 at the end of yesterday. Today, it drops to £7,200. The drawdown is:

Drawdown=(9,000−7,200)9,000×100=20%\text{Drawdown} = \frac{(9,000 – 7,200)}{9,000} \times 100 = 20\%

This ensures short-term accountability and encourages daily risk monitoring.

3. Equity% – Current/Yesterdays.Balance

Here, drawdown is based on the larger loss between the current balance and yesterday’s balance. This dual comparison ensures risk is controlled regardless of whether losses occur within a single day or over multiple days.

Example:

• Yesterday’s balance: £10,000
• Today’s current balance: £7,500
• Starting balance: £9,000

The drawdown is calculated against £10,000, the higher loss source, yielding:

Drawdown=(10,000−7,500)10,000×100=25%\text{Drawdown} = \frac{(10,000 – 7,500)}{10,000} \times 100 = 25\%

This ensures significant losses are captured, regardless of the timeframe.

4. Equity% – Initial/Yesterdays.Balance

This approach measures drawdown relative to the initial balance or yesterday’s balance, whichever results in a higher drawdown. It’s a hybrid method combining long-term and short-term risk perspectives.

Example:

• Initial balance: £10,000
• Yesterday’s balance: £9,000
• Today’s balance: £6,000

The drawdown uses £10,000 as it results in the larger loss:

Drawdown=(10,000−6,000)10,000×100=40%\text{Drawdown} = \frac{(10,000 – 6,000)}{10,000} \times 100 = 40\%

5. Equity% – Initial/Current.Balance

This metric assesses drawdown against the lower value of the initial or current balance, focusing on absolute worst-case scenarios.

Example:

• Initial balance: £10,000
• Current balance: £7,000

The drawdown reflects the steeper decline:

Drawdown=(10,000−7,000)10,000×100=30%\text{Drawdown} = \frac{(10,000 – 7,000)}{10,000} \times 100 = 30\%

6. Equity% – Peak.Balance

This method calculates drawdown as a percentage of the highest balance achieved during the trading period. It tracks losses from the most favourable financial point, encouraging traders to protect gains.

Example:
Your account peaks at £12,000 before dropping to £9,000. The drawdown is:

Drawdown=(12,000−9,000)12,000×100=25%\text{Drawdown} = \frac{(12,000 – 9,000)}{12,000} \times 100 = 25\%

This incentivises traders to avoid complacency after reaching significant profit milestones.

7. Equity% – Peak.Equity (Not Used)

While this metric measures drawdown from the highest equity level, Liquid Markets avoids this method due to its potential unfairness in volatile markets. Unrealised equity often fluctuates sharply, and tying drawdowns to fleeting peaks could punish traders unfairly.

Adapting Drawdown Metrics for Fairness

At Liquid Markets, we understand that no single drawdown calculation fits all trading styles or account types. This is why:

• Demo Accounts use less restrictive metrics, such as Equity% – Initial.Balance, to foster learning.
• Live Accounts transition to more robust metrics like Equity% – Initial/Yesterdays.Balance to ensure consistent discipline.

.lacma, our AI system, dynamically adjusts these parameters based on account type and trading conditions, maintaining fairness while safeguarding the firm’s capital.

Inspiration for Traders: Balancing Risk and Reward

Every trader aspires to maximise profits, but the key to longevity lies in managing risk. Drawdown rules are not restrictions—they are your safety net. At Liquid Markets, these metrics are designed to challenge you, protect you, and help you grow as a disciplined trader.

Imagine a scenario: you’ve had a stellar run, doubling your balance. But a sharp reversal in a fast-moving market wipes out half your gains. Thanks to your trading plan’s drawdown metric, you avoided breaching limits, preserved your capital, and kept your trading privileges intact. This is the power of well-managed drawdown.

Conclusion

Understanding and respecting drawdown calculations is a hallmark of a professional trader. At Liquid Markets, we’re committed to fostering a trading ecosystem where fairness, risk management, and growth coexist. Trust .lacma to handle the numbers, so you can focus on strategy. Remember: drawdowns don’t define you—they refine you. Stay disciplined, trade smart, and thrive.