No trader has ever quit at equity highs.
Drawdowns part one: why they end careers, and the sizing plan that gets you through.
Dave said something on this week’s episode that stuck with me. No trader has ever quit at equity highs. Every quit happens in a drawdown. That’s what makes them dangerous. Not the money, the identity. Ten years later the drawdown is a blip on the curve. In the moment it’s existential, because you never know how long the tunnel is. Tell someone their 20% drawdown ends in six months and they’d sail through it. Nobody gets told.
The preparation rule: take your backtest’s max drawdown and double it. Take the longest peak-to-peak stretch and double that too. If you couldn’t survive both, financially and mentally, the sizing is wrong or trading can’t be the only income yet.
And the fix is programmatic sizing, decided before you need it. Risk a fixed percentage of current equity and recalculate constantly, so you shrink into drawdowns and grow out of them automatically, in increments too small to feel. One trader Dave works with resizes daily and deliberately gets back to full size faster than he came down, because his systems snap back hard. The whole episode collapsed into one topic, and it wasn’t strategy tweaks. Sizing is the difference between a recoverable drawdown and a career-ending one. Our systems live through this too. The Drawdown Memo exists because ours are published, not hidden.
If you want the sizing, entries, and stops handled for you across ten systems, that’s Stats Edge Pro. $149.99 a month, 30-day money-back guarantee.
Michael Nauss, CMT, CAIA, CDMS
The "double your backtest's max drawdown, then double the duration" rule is one of the most honest sizing tests I've seen written down. One question on the resizing: the trader who gets back to full size faster than he came down — doesn't that reintroduce the risk right at the worst spot? I've ended up with an asymmetric ratchet (a loss shrinks the next position immediately, wins rebuild size much slower), mainly because under a prop firm's trailing drawdown the fastest way to die is regaining full size just before the second leg down. Curious whether the snap-back speed is system-specific or a general rule for him.