The maximum daily drawdown is the largest amount your account is allowed to lose in a single day. In this case, the limit is 4% of your account balance at the start of the trading day.
For a $100,000 account, a 4% maximum daily drawdown means you can lose up to $4,000 in one day. If your losses hit or exceed that amount, trading would typically be stopped for the day to prevent further drawdown.
Example:
- Starting account balance: $100,000
- 4% of $100,000 = $4,000
- If during the trading day your account equity drops to $96,000 (or lower), you've hit your max daily drawdown.
- Trading would then be halted to preserve capital and manage risk.
This rule is in place to encourage disciplined risk management and to limit large single-day losses.