Equity Curve

Context & Mechanics

Definition

The equity curve plots the account value over time – depending on resolution after each trade, daily or weekly. A distinction is made between closed equity (realised gains/losses only) and open equity (including running positions); prop-firm limits usually calculate with open equity, which is why paper losses count too.

What the curve reveals

Three features carry the information: the slope shows earning power – per trade it corresponds to expectancy. The fluctuation around the trend shows risk; the volatility of returns feeds from it. The valleys are drawdowns; the deepest is the maximum drawdown. In addition, the underwater curve (distance to the last high over time) makes visible how long a strategy was under water – often more informative for everyday resilience than pure depth.

The equity curve in prop trading

Prop-firm rulebooks are functions of the equity curve: the daily loss limit bounds the daily segment, the overall loss limit the total depth, a trailing drawdown follows its high. Understanding your own curve shows immediately which rulebook fits it. Equity-curve trading is also widespread – throttling the strategy when the curve falls below its moving average; the evidence for it is mixed, but the concept is a useful mental model for regime dependence.

Why it matters for traders

The equity curve is the most honest feedback instrument: it aggregates every decision into one picture. In the GlanWick simulator every run automatically produces an equity curve including drawdown analysis that can be checked against challenge rulebooks – GlanWick is a training and simulation tool and not a prop firm itself.

Execution Example

After 100 trades on a $100,000 account a trader plots the balance per trade: final value $137,500, interim high $112,000, followed by a trough at $103,600.

Slope: +$37,500 across 100 trades ≈ $375 per trade – the strategy's expectancy.
Measure the valley: high $112,000 → low $103,600 = 7.5 % maximum drawdown.
Underwater analysis: the curve sat below its high for 18 trades – the dry spell that had to be endured psychologically.
Rulebook check: at 7.5 % depth the curve would stay under a 10 % overall loss limit; a 5 % trailing drawdown from the high, however, would have been breached – same trading, different rulebook, different outcome.

Execution Risk & Errors

Looking only at the final value and ignoring the curve's shape and valleys

Confusing closed and open equity although prop-firm limits mostly calculate on open equity

Underestimating the duration of underwater phases and discarding strategies in normal dry spells

Equating a smooth backtest curve with a resilient live curve

Never checking one's own curve against the concrete challenge rulebook

Frequently Asked

What is the difference between closed and open equity?

Closed equity counts only realised results, open equity also running paper gains and losses. Prop-firm loss limits usually calculate with open equity.

What is an underwater curve?

It shows, for every point in time, the distance of equity to its previous high. That makes visible how deep and how long a strategy was in drawdown.

How do I recognise a healthy equity curve?

By steady slope, moderate fluctuations and shallow, short valleys. Perfect smoothness, however, is suspicious – it hints at overfitting or hidden tail risks.

What is equity-curve trading?

Throttling or pausing one's strategy when the equity curve falls below its moving average. Evidence is mixed; as a risk brake in regime changes the concept is nevertheless widespread.