Drawdown management
Protecting Your Capital
Effective drawdown management is the cornerstone of long-term trading success, preventing small losses from becoming catastrophic.
Core Defense Mechanisms
1. The 2% Rule
- Never risk more than 2% of capital on any single trade
- Example: $100,000 account = $2,000 max loss per trade
- Ensures survival through losing streaks
2. Circuit Breakers
- Daily loss limit (5% of account)
- Weekly loss limit (10-15%)
- Monthly drawdown cap (20%)
3. Position Correlation Control
- Maximum 15-20% exposure to any single sector
- Limit highly correlated positions
- Monitor beta-weighted portfolio risk
QuantWave Drawdown Protection Tools
| Tool | Function | Activation Point |
|---|---|---|
| Volatility Filter | Reduces position size | When VIX > 30 |
| Liquidity Monitor | Warns of exit risks | Below average volume |
| Correlation Dashboard | Shows hidden risks | Real-time monitoring |
Advanced Protection Strategies
1. Dynamic Position Sizing
- Reduce size after consecutive losses (3+)
- Scale down during drawdown periods
- Rebuild gradually after recovery
2. Market Condition Adjustments
- Tighten stops in choppy markets
- Reduce leverage during Fed meetings
- Increase cash during earnings season
3. Psychological Breaks
- Mandatory cooling-off period after big losses
- Reduce trading frequency during drawdowns
- Switch to paper trading if needed
Common Drawdown Triggers
- Over-trading during losing streaks
- Ignoring stop losses
- Position concentration
- Strategy drift
Recovery Protocol
- Analyze drawdown causes
- Reduce position sizes by 50%
- Focus on highest-probability setups
- Gradually rebuild after 3 consecutive wins
- Only return to normal size after recovering 75%
Professional traders don't avoid drawdowns - they manage them systematically. By implementing these protective measures and using QuantWave's risk tools, you can navigate inevitable losing periods while preserving capital for future opportunities.