At Impulse World, we believe that thoroughly understanding concepts like Equity and Drawdown is fundamental to your success as a trader. These indicators not only reflect your current performance but are also crucial for effective risk management.
What is Equity?
Equity is a fundamental concept in trading that reflects the total real value of a trading account at a given moment. It is calculated using the following formula:
Equity = Balance + Floating
Where:
Balance: The amount of money in the account without considering open positions.
Floating: Refers to the unrealized gains or losses of your open trades in the market.
Why is Equity Important?
Equity provides a more accurate and current picture of your trading account's performance. Unlike balance, which only reflects the results of closed trades, Equity also takes into account the impact of open positions. This means Equity varies in real time with market fluctuations, giving you a clear measure of how your active trades are affecting your account's value.
Equity vs. Balance: Which is Better?
Although both Equity and Balance are valuable indicators, they have different applications and meanings:
Balance: Useful as a general reference for the funds in your account, but it does not reflect the current situation if you have open trades.
Balance = Deposits + History - Withdrawals
Equity: Provides a real-time view of the impact of your open trades, crucial in a constantly changing market.
Equity = Balance + Floating
At Impulse World, we prefer Equity as the main indicator for evaluating traders' performance, since it offers a more complete and objective view of results.
Why Do We Measure by Equity?
Our decision to use Equity as the main measure is based on several key factors:
Real-time performance reflection: Provides an accurate and up-to-date view of account performance.
Effective risk management: Encourages constant awareness of market exposure.
Informed decisions: Allows for more timely decisions based on up-to-date information.
Objective and precise evaluation: Allows us to evaluate performance more effectively.
Promotes professionalism: Encourages a more holistic and mature approach to a trading career.
Understanding Drawdown
Drawdown is a crucial measure for risk management at Impulse World. We have two main types of Drawdown:
Daily Drawdown
The Daily Drawdown limit is set so that the difference between the current Equity and the Initial Equity of the day does not exceed 5% or 3%, depending on the account type; in this case we will use 5% as the example. However, the logic remains the same for the 3% Daily Drawdown.
(EQ_{ID} - EQ) / EQ_{ID} < 5%
Where:
EQ_{ID}: Initial Equity of the day
EQ: Current Equity
For example, if a trader starts the day with an Initial Equity of $100,000, the Daily Drawdown limit is automatically set at $95,000. During the trading day, Equity must not fall below that limit.
If Equity is $102,000 at the end of the day, the new Daily Drawdown limit will be $96,900 the following day. This calculation is automatically updated every day at 7:00 PM (Peru time zone), with no need for the trader to make any manual adjustment.
Maximum Loss
Maximum Loss is calculated to ensure that no total loss exceeds 10% or 8% of the Maximum Equity reached, depending on the account type; in this case we will use 10% as the example. However, the logic remains the same for the 8% maximum Drawdown.
(EQ_M - EQ) / EQ_M < 10%
Where:
EQ_M: Maximum Equity reached
EQ: Current Equity
For example, if a client starts a challenge with a $100,000 account, their maximum loss will be set at $90,000. If, as a result of their trades, they reach an equity of $105,000, their maximum loss is updated to $94,500.
How Is the Loss Limit Updated After a Withdrawal During the Funded Phase?
Each time you make a profit withdrawal, your account's loss limit — both total and daily — will be automatically adjusted based on the drawdown recorded before the withdrawal. This adjustment more accurately reflects the account's financial status and ensures that the loss limits stay aligned with your account's performance up to that point.
Practical Example of a Loss Limit Adjustment
To illustrate this adjustment, let's take the following example:
Initial balance: $100,000
Maximum equity recorded: $110,000
Total loss limit set: $99,000 (90% of the maximum recorded equity)
Last equity recorded before the withdrawal: $105,000
Daily drawdown: 1%
Remaining drawdown for the daily loss limit: 4%
Total drawdown: 4.54%
Remaining drawdown until reaching the total loss limit: 5.46%
Withdrawal: $5,000
Initial equity after the withdrawal: $100,000
In this case, after the withdrawal, the system will apply the adjustment to the loss limit based on the drawdown recorded before the withdrawal. This means:
New total loss limit: $100,000 - 5.46% = $94,540
New daily loss limit: $100,000 - 4% = $96,000
This adjustment provides a loss limit that takes into account the evolution and previously accumulated losses of your account, providing more precise capital protection.
It should be noted that the daily loss limit, regardless of the daily drawdown prior to the withdrawal, will be updated to 5% at the start of each day at 00:00 UTC, and it does so based on the Initial Equity of that new day.
Resetting the Loss Limit When Reaching New Levels in PRO LEAGUE
Each time you reach a new level in PRO LEAGUE, such as Impulse I, the loss limit will automatically reset to 10% of the equity after the withdrawal, regardless of any previously recorded drawdown. This reset allows the trader to resume trading with a renewed loss limit, without the influence of previous drawdowns, so they can move forward with greater flexibility into the next stage of their development in PRO LEAGUE.
This system ensures risk management that is more aligned with the real financial situation of your account, and reflects each trader's performance capability fairly and accurately.
Calculation Time
It is important to highlight that, for the purposes of calculating the Daily Drawdown, the start of the day is set according to UTC time, that is, at 00:00 UTC. This time marks the beginning of a new trading day on our platform and is the moment when the Initial Equity is determined for that day's respective calculations.
By setting a clear universal schedule, we ensure that all our traders, regardless of their geographic location, operate under the same standards and conditions. This provides consistent and fair risk management for our entire community of traders at Impulse World. Remember, it is essential to stay aware of these schedules in order to properly manage your trades and avoid violations of the Daily Drawdown and Maximum Loss policies.
Conclusion
Understanding and monitoring your Equity, as well as respecting the Drawdown limits, are crucial aspects of your success as a trader at Impulse World. These metrics not only reflect your current performance, but also help you maintain effective and sustainable risk management over the long term.
Remember, trading involves risks, and a deep understanding of these metrics will help you navigate the markets with greater confidence and professionalism.