drawdown-playbook

Skill: Drawdown Playbook | Domain: trading/risk-and-portfolio | Category: risk | Level: advanced Tags: drawdown, recovery, equity-curve, max-dd, protocols

Drawdown Playbook

1. Drawdown Taxonomy

Types

Measurement

Max Drawdown (MDD):
  MDD = (Peak - Trough) / Peak × 100

Average Drawdown:
  Avg of all drawdown periods in lookback window

Drawdown Duration:
  Time from peak to recovery (not just to trough)

Ulcer Index:
  UI = sqrt(mean(DD²)) — penalizes deep AND long drawdowns

2. Drawdown Thresholds & Responses

Tiered Response Protocol

LEVEL 1: CAUTION (DD = 3-5% of account)
├── Review: Check if within strategy expected DD
├── Action: Reduce position size by 25%
├── Monitor: Tighten review frequency to per-trade
└── Journal: Document what's happening in market

LEVEL 2: WARNING (DD = 5-10% of account)
├── Review: Full strategy audit — is this regime change?
├── Action: Reduce position size by 50%
├── Restrict: No new strategy experiments
├── Require: Every trade needs written thesis before entry
└── Timeline: If no recovery in 10 sessions, escalate

LEVEL 3: CRITICAL (DD = 10-15% of account)
├── Action: Reduce to 1 instrument, 1 strategy, minimum size
├── Pause: No trading for 24-48 hours minimum
├── Audit: Full performance review with data
│   ├── Win rate vs historical
│   ├── Average R vs historical
│   ├── Are losses from stops or blowups?
│   └── Regime classification check
├── Require: Paper trade for 5 sessions before resuming
└── Consider: Is the strategy broken or am I broken?

LEVEL 4: EMERGENCY (DD > 15% of account)
├── Action: STOP TRADING. Full stop.
├── Close: All open positions at market
├── Duration: Minimum 1 week away from screens
├── Requirement: Complete written post-mortem before resuming
├── Review: Account sizing — is total capital at risk appropriate?
└── Return: Restart at LEVEL 1 position sizes for 20+ trades