Drawdown
Drawdown is your account’s peak-to-trough decline. Managing drawdown is critical.
Drawdown Formula
Drawdown % = (Peak - Current) ÷ Peak × 100
Example:
Peak: $10,000
Current: $8,000
Drawdown = ($10,000 - $8,000) ÷ $10,000 × 100 = 20%
Drawdown Limits
| Drawdown | Action |
|---|---|
| 5% | Normal — continue |
| 10% | Reduce size 50% |
| 15% | Stop trading, review |
| 20% | Mandatory pause |
| 25%+ | System review |
Drawdown Impact
| Drawdown | Recovery Needed |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 90% | 900% |
Key: Smaller drawdown = easier recovery.
Maximum Drawdown Strategy
Rule: 6% Max Daily
Maximum daily drawdown should not exceed 6%.
| Account | Max Daily Loss |
|---|---|
| $1,000 | $60 |
| $5,000 | $300 |
| $10,000 | $600 |
| $25,000 | $1,500 |
Common Mistakes
1. Not Stopping
Problem: Trading through drawdown.
Result: More losses.
Fix: Respect drawdown limits.
2. Revenge Trading
Problem: Trying to recover fast.
Result: Bigger losses.
Fix: Stop, review, then restart.
Key Takeaways
- Limit at 10% — Reduce size
- Stop at 15% — Mandatory pause
- Easy to lose — Hard to recover
- Small losses — Stay small
- Recovery shows — Math is hard
Related
daily-limits.md >>>
stop-loss.md >>>
Manage drawdown. Preserve capital.