HWM: High-Water Mark
Also known as: high water mark, watermark, peak equity, equity peak
What is it?
A high-water mark is the highest equity an account has ever reached, and it is the line that must be passed before a manager earns another performance fee. The mechanism exists to stop an investor paying twice for the same gain. Say an account starts at 100,000 dollars and rises to 120,000. The manager earns a 20 percent fee on the 20,000 of profit, or 4,000 dollars, and the high-water mark becomes 120,000.
- 1Start: equity at $100,000 The high-water mark begins at the opening balance. Everything above this line counts as new profit the manager can charge a performance fee on.
- 2Peak: equity reaches $120,000 A 20 percent fee applies to the $20,000 gain, so $4,000 is charged. The high-water mark is now set at $120,000, and it does not move back down.
- 3Drawdown: equity falls to $105,000 That $15,000 loss is entirely yours. The mark stays at $120,000, which is exactly what stops you being charged twice for the same profit.
- 4Recovery to $118,000 earns nothing The account has gained $13,000 back from its low, but it is still under the mark. No performance fee accrues on any part of this recovery.
- 5Above $120,000: new profit, new fee Only the amount above the old mark counts. At $121,500 the fee applies to $1,500, and the high-water mark moves up to $121,500.
The account then falls to 105,000. On the recovery back up to 118,000 the manager earns nothing at all, because equity is still below the mark. Only once it passes 120,000 does a new fee accrue, and only on the amount above that line. The same line does double duty outside fee agreements.
In prop-firm and funded-account rules the maximum drawdown is often measured from the high-water mark rather than from the starting balance, which is called a trailing drawdown: every new equity peak drags the breach level up behind it. An account that has run from 50,000 to 53,000 under a 5 percent trailing rule can no longer fall below 50,350, even though it is still clearly in profit.
Why it matters: The high-water mark stops you paying a performance fee twice on the same profit, and in a funded account it is the line your drawdown limit trails behind.
Performance fee = (current equity - high-water mark) x fee rate, and only while current equity is above the mark
When a drawdown limit trails the high-water mark, every new equity peak permanently tightens how far the account can fall before it breaches.
Real-world example
A funded account under a 5 percent trailing drawdown ran from 50,000 to 53,000 dollars, lifting the breach level from 47,500 to 50,350 -- so giving back 2,700 of an unrealised 3,000 gain would have ended the account.
How SignalBots handles it
SignalBots signals carry a stop-loss on every setup, which is what lets you size a trade against a trailing drawdown line rather than against your starting balance. See /risk-warning.
Pro tip
On a trailing-drawdown account, track your distance to the breach level from the peak, not from your deposit. The number that matters moves every time you make a new high.
Common pitfalls
Assuming the high-water mark protects your capital. It only limits duplicate fees; the losses that took the account below the mark are entirely yours.
Frequently asked questions
Does a high-water mark ever reset?
In fee agreements it usually only rises, but some contracts reset it annually, which lets a manager charge again after a losing year. Read that clause specifically, because an annual reset removes most of the protection the mark is supposed to give.
Is a high-water mark the same as a trailing drawdown?
No, but the two are linked. The high-water mark is the peak itself; a trailing drawdown is a limit measured a fixed distance below that peak, so it moves up whenever the mark does.
Does it trail on balance or on equity?
It varies by firm and it matters a great deal. An equity-based mark rises with unrealised profit on an open trade, so a position that runs up and comes back can tighten your limit. A balance-based mark only moves when a trade actually closes.
Why do investors ask for one?
Without it, a manager who lost 20 percent and then regained it would charge a performance fee on the recovery, billing the investor for getting back to where they had already been.
How should it change my position sizing?
Size against the distance to the breach level rather than the account balance. Late in a profitable run that gap can be far smaller than the balance suggests, and the correct trade size shrinks with it. Your capital is at risk.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
