Before a drawdown
Define:- the equity measure and high-water mark;
- expected drawdown ranges from historical and simulated paths;
- warning, reduction, and stop thresholds;
- personal limits inside any prop-firm boundary;
- which metrics trigger an execution audit;
- who or what can change size;
- evidence required to resume normal risk.
During a drawdown
1
Reconcile the data
Confirm fills, fees, slippage, missing trades, platform incidents, and calculation accuracy.
2
Audit adherence
Identify late entries, stop changes, sizing errors, skipped trades, and correlated exposure.
3
Compare with the expected range
Evaluate the current path against distributions, not against the average result.
4
Apply the predefined action
Reduce size, stop for the session, or pause the strategy when the relevant threshold is reached.
5
Review the strategy hypothesis
Look for structural changes only after process errors are separated from market outcomes.
What not to do
- increase size to reach the prior peak faster;
- widen stops to avoid realizing a loss;
- add correlated positions without available idea-level capacity;
- replace the strategy after a small, statistically ordinary sample;
- continue trading after a personal or external limit;
- reduce size after losses and increase it immediately after wins without a tested rule.
Drawdown response table
A reduced size changes the future return distribution as well as the risk. Recovery plans should focus on restoring a valid process, not on reaching the prior balance by a deadline.
Drawdown mathematics
Understand recovery asymmetry.
How losing streaks behave
Compare the live path with plausible sequences.
Daily vs maximum loss
Fit the response inside prop-account rules.
Automating risk
Enforce objective thresholds consistently.