Risk Management

Managing Maximum Drawdown

A 50% drawdown requires a 100% recovery — keeping drawdown small is critical to long-term compounding.

Key rules

  1. A 50% drawdown requires 100% return just to break even
  2. Set a maximum drawdown limit and respect it absolutely
  3. Reduce position size after losses — do not increase to 'recover'
  4. Track drawdown in your journal alongside win rate and expectancy
  5. A drawdown is information — analyse its cause, don't just endure it

Drawdown is the percentage decline from an account peak to a trough. A 20% drawdown requires a 25% recovery. A 50% drawdown requires a 100% recovery. Keeping maximum drawdown small dramatically improves compounding potential.

Set a maximum account drawdown level (e.g. 10%) at which you stop trading, review your strategy, and only resume once the cause is identified and addressed.

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