Understanding ETX's Daily Loss Limit and Drawdown Policy
At ETX, we have established clear rules to protect our traders from significant losses and to promote responsible trading practices. One of the key aspects of these rules is the Daily Loss Limit, which is closely tied to the concept of drawdown. Let's break down how this works:
What is Drawdown?
Drawdown is a term used to describe the decline in the value of a trader's account from its peak to its lowest point. In simpler terms, it represents the amount by which a trader's account balance has decreased due to losing trades. Managing drawdown is essential to prevent substantial losses and to maintain a healthy trading account.
Daily Loss Limit and Its Determination
At ETX, the Daily Loss Limit is a critical rule designed to safeguard traders from excessive losses. Here's how it works:
Previous Closing Balance: The Daily Loss Limit for each trading day is determined by the previous day's closing balance. This means that your account's ending balance at the close of the previous trading day sets the threshold for how much you can lose on the following day.
Equity and Floating Drawdown (DD): Equity in your trading account includes your current balance plus any unrealized gains or losses from open trades. If you are in a floating drawdown—meaning your open trades are currently negative—and your equity reaches the Daily Loss Limit, all your open trades will be closed out, and your account will be suspended. This mechanism ensures that you do not incur losses beyond the predetermined limit.
Drawdown Reset Timing
To ensure clarity and consistency, the drawdown reset time is a crucial part of our policy:
Reset Time: The drawdown resets daily at 5 PM EST, with a margin of plus or minus 5 minutes. This reset means that after 5 PM EST, your Daily Loss Limit is recalculated based on your account's closing balance from that day, and you start fresh with a new limit for the next trading day.
Example Scenario
Let's illustrate this with an example:
Day 1 Closing Balance: Assume your account's closing balance on Day 1 is $10,000.
Day 2 Daily Loss Limit: The Daily Loss Limit for Day 2 will be based on this $10,000 balance. Suppose the limit is set at 5%, which means your maximum allowable loss for Day 2 is $500.
Day 2 Trading: If you enter trades on Day 2 and your equity falls to $9,500 (considering both balance and floating DD), your trades will be automatically closed, and your account will be suspended to prevent further losses.
Day 3 Reset: At 5 PM EST on Day 2, the drawdown resets, and the new Daily Loss Limit for Day 3 will be calculated based on the closing balance of Day 2.
Suspension and Account Loss
It's important to note that once an account is suspended due to reaching the Daily Loss Limit, you lose the account indefinitely. This means you can no longer trade on that account, and it will remain closed permanently. This strict rule emphasizes the importance of adhering to the Daily Loss Limit to avoid permanent account loss.
Importance of the Policy
This policy serves multiple purposes:
Risk Management: It helps traders manage risk by capping potential losses within a trading day.
Discipline: It encourages traders to be disciplined and cautious with their trades, knowing that excessive losses will lead to account suspension.
Account Protection: It protects the trader's capital and the firm's resources, ensuring sustainable trading practices.
At ETX, we believe that understanding and adhering to these rules is fundamental to achieving long-term trading success. Our goal is to provide a secure and supportive trading environment where traders can grow and develop their skills while minimizing unnecessary risks.