A trader\'s money management system

P1: PIC/b P2: c/d QC: e/f T1: g
c09 JWBK182-McDowell April 25, 2008 16:7 Printer: Yet to come

82 A TRADER’S MONEY MANAGEMENT SYSTEM

Drawdown can be the result of a series of consecutive losses or from

one loss. It is important to record historical data when trading your system

to determine the following:

Largest account drawdown in percentage. This is the largest percent

of equity lost in a drawdown. It tells you your worst-case scenario and

can be used to help predict the highest future loss.


Largest account drawdown in dollars. This gives you a handle on actual

dollars you can lose during drawdown.


Largest number of consecutive losses. Historically, what is the maxi-

mum number of losses in a row? This figure can be used to estimate

future drawdown events. For example, if your system has a maximum

number of five losses in a row and you are risking 2 percent on each

trade, your total maximum drawdown would be approximately 10 per-

cent of your trading account. If you know this is normal, you will con-

tinue trading. Statistically, you are likely to benefit from winning trades

following the drawdown.

The psychological impact of drawdown can be significant. This is

where self-doubt and ego come into play. This is when you will be tested

and will develop “The Trader’s Mindset.”