What has been said publicly
The FAQ answers a question on drawdowns directly: the largest losses usually came from shorting, the biggest percentage drawdown was 50% in 2014, and drawdowns are now kept to 15 to 20%, which happens a few times a year. These are self-reported figures.
The drawdown thread collected in Some good Tweetstorms makes the point that the best traders and the best stocks spend most of their time in a drawdown, and that this is a feature rather than a flaw. In replies in the comments under the three-setups article, Kullamägi suggests decreasing size until there is confidence in the setups and sell rules, and describes taking fewer or no trades in a weak market.
The recovery arithmetic
Needs +11%
A 10% drawdown needs an 11.1% gain to recover.
Needs +25%
A 20% drawdown needs a 25% gain.
Needs +100%
A 50% drawdown needs the account to double.
The required gain grows faster than the loss. That asymmetry is the plain reason to slow losses down early rather than late.
Why cut size rather than stop trading
A drawdown is ambiguous. It can be normal variance in a sound method, a market where the setups are not working, or a change in how the trader is executing. Cutting size keeps trading going, so the method keeps being tested, at a cost that leaves room for all three explanations. At a 25% win rate, long losing streaks are expected; see why a low win rate can still work. When the cause is the market, the market regime guide covers what to watch.
A written plan (ours)
The levels below are this site's own example, not rules from the source material. The value is in deciding the numbers before the drawdown starts.
- Normal: full planned risk per trade.
- Down 5% from the equity high: halve the risk per trade.
- Down 10%: halve it again, and take only the clearest setups.
- Down 15%: stop opening new positions; review the log before resuming.
Rebuilding size
Cutting is the easy half. Without a rule for rebuilding, size stays small through the recovery and the account climbs back slowly. One approach, again our example: step risk back up one level after a set number of winning trades or after recovering half the drawdown, and return to full size only at a new equity high.
The drawdown plan
- Track equity against its high every day.
- Write the cut levels and the risk at each level.
- Write the rule for stepping back up.
- At each level, review the last trades for execution errors.
- Check the market regime before blaming the method.