Sizing during drawdown
Adjust risk percent downward when your account hits a drawdown threshold, and describe how the de-leveraging schedule protects equity and psychology.
Lesson path
Options, Risk Math, and Psychology
Position Sizing in Detail
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Adjust risk percent downward when your account hits a drawdown threshold, and describe how the de-leveraging schedule protects equity and psychology.
When the account is bleeding, you cut size
Fixed fractional sizing already shrinks your dollar risk a little when your account drops, because the percent stays constant on a smaller balance. That's not enough. During a real drawdown, the right move is to drop the percent itself. Pros call this a de-leveraging schedule. Beginners call it 'why am I cutting size when I need to win it back?' Here's why.
Drawdowns are evidence. Either your edge is temporarily out of sync with the market regime, or your process is slipping, or both. In every one of those scenarios, sizing down protects you while you figure out which. Sizing up during a drawdown — to 'win it back faster' — is the most common way small accounts go from drawdown to wipeout. It's the same math that makes the Martingale strategy in casinos famous for destroying gamblers.
A simple schedule. Account at full health: risk your normal 1% (or 0.5% if you're still in beginner mode). Down 10% from peak: cut risk in half. Down 15%: cut risk by 75%. Down 20%: stop trading entirely and review. Concrete numbers on the $500 account. Peak at $500 risking 1% ($5). Drop to $450 (-10%): risk drops to 0.5%, which is $2.25 per trade. Drop to $425 (-15%): risk drops to 0.25%, about $1.06 per trade. Drop to $400 (-20%): close everything, journal review, no new trades until you can name what went wrong.
How do you climb back out? With patience. At reduced size, each winning trade earns less, so the recovery is slower. That's the cost. The payoff is that your floor is much higher. A trader who cuts size during drawdown might take three months to recover. A trader who doubles size to win it back fast usually doesn't have an account three months later. Recap: when the account is bleeding, cut size in tiers. Climb back at smaller size. Resume normal sizing only after a clean recovery to within 5% of the prior peak.
Knowledge check
Answer before moving on.
1. Your $500 account is down 10% to $450. You were risking 1% per trade. What should your new per-trade risk percentage be using the standard de-leveraging schedule?
2. What's the trade-off of de-leveraging during a drawdown?
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