Drawdown throttle - GetProfitable

A throttle is a step function on top of your normal sizing. For example: full size above a 5% drawdown from the high-water-mark, 70% size between 5% and 10%, 50% between 10% and 15%, stop at 20%.

What it buys you is runway. With 1% risk per trade and no throttle, twenty consecutive losers costs roughly 18% of equity. With the throttle above, the same twenty losers cost about 13%, and the number of consecutive losses needed to reach a 20% drawdown rises substantially. You are trading some recovery speed for a much lower chance of reaching the point where you quit.

The cost is real and should be stated: you are smallest exactly when the recovery trades arrive, so throttled equity curves recover more slowly than unthrottled ones. That is the premium on the insurance, and for most traders the psychological benefit alone justifies it.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.