Drawdown Management
The strategy for surviving and recovering from periods of consecutive losses without destroying the account
Drawdown management encompasses both the mathematical and psychological approaches to handling losing periods. Mathematically, a 10% drawdown requires an 11.1% gain to recover, a 20% drawdown requires 25%, and a 50% drawdown requires 100%. This asymmetry makes prevention critical. Fixed percent risk provides automatic protection by reducing position sizes during drawdowns. Psychologically, drawdowns trigger revenge trading (sizing up to recover faster), fear-based conservatism (reducing risk too much during recovery), and overtrading (taking low-quality setups to generate more opportunities). The solution is pre-defined rules: maximum daily loss limit (2-3%), fixed risk per trade regardless of recent results, and maximum daily trade count.
✓How to Recognize
- •Recovery math: 5% DD = 5.3% to recover, 10% = 11.1%, 20% = 25%, 50% = 100%
- •Fixed percent risk auto-scales: smaller account = smaller positions = smaller losses
- •Pre-define maximum daily loss (2-3%) — close charts when hit
- •Prop firm context: 10% max DD = need 20 consecutive losses at 0.5% to fail
⚡How to Avoid
- →Revenge trading: sizing up after losses to "recover faster"
- →Scaling risk down too far during recovery (extends the drawdown period)
- →Not having a maximum daily loss rule (single bad day can spiral)
- →Focusing on P&L during drawdowns instead of execution quality