A high water mark is the peak account balance a funded trader has reached, used as a reference point for calculating certain rules and payouts. In prop trading, the high water mark most commonly appears in two contexts: as the anchor point for trailing drawdown calculations, and at some firms as the threshold above which future profit share is paid. 

When a firm uses trailing drawdown, the high water mark is the highest balance the account has reached, and the drawdown limit trails behind it at a fixed distance. On a $100,000 account with a $5,000 trailing drawdown, if the account grows to $108,000, that becomes the new high water mark and the drawdown threshold moves up to $103,000. If the account then draws back to $104,000, no new high water mark is set. The threshold stays at $103,000 until a new high is reached.

Some firms also apply a high water mark to payout calculations, particularly on scaling programs where additional profit share is paid only on gains above the previous peak balance. This prevents a trader from being paid twice on the same profits after a drawdown and recovery. If the account reaches $110,000, draws back to $100,000, and then recovers to $105,000, no additional payout is triggered because the balance is still below the $110,000 high water mark. The next payout comes when the account exceeds $110,000.