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QuantSchool: 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

1. Analyze drawdown causes
2. Reduce position sizes by 50%
3. Focus on highest-probability setups
4. Gradually rebuild after 3 consecutive wins
5. 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.