Max Drawdown Controller

For most active traders: 15-20%. Conservative: 10-15%. Aggressive: 20-25%. Key is setting a limit you can financially survive AND psychologically handle. Take the lower of those two.

Daily minimum. In volatile markets or when in drawdown, check more frequently. Many traders check at market close. Some set up automated alerts at threshold levels.

Increase attention but don't panic. Review all positions. Prepare a reduction plan (which positions to cut first). Tighten stops. Don't add new positions. Watch closely.

A graduated approach is usually better. But if you're AT your absolute maximum, yes - preserve capital. The goal is to never actually hit the max by taking action at lower thresholds.

Gradually. Don't jump back to full exposure. Add back in stages as the portfolio recovers (e.g., at 25%, 50%, 75% recovery). This prevents whipsaw if the market turns down again.

Two approaches: (1) Widen limits when volatility is high (20% DD in high vol equals 15% in normal). (2) Keep fixed limits but reduce position sizes when vol rises so that higher volatility doesn't breach your limit.

Priority: (1) Weakest positions (furthest from target). (2) Most volatile/risky. (3) Largest positions (reduce concentration). (4) Worst momentum. Focus on reducing what's most likely to continue hurting.

Concentrated portfolios have larger drawdowns. Either: (1) Accept higher limits. (2) Diversify. (3) Use options to define max loss. For TSX sector concentration, consider sector-level drawdown triggers.

If a single position is driving drawdown, that's position sizing/concentration issue. Cut the position. Review why it was so large. Implement stricter position limits going forward.

At minimum, require sustained recovery at each level (5-10 days holding above threshold before adding). Don't rush. The opportunity cost of being cautious is less than the cost of another drawdown.

Protective puts set a hard floor (strike = max loss). Collars (put + short call) fund protection with upside cap. Put spreads provide cheaper partial protection. Roll monthly/quarterly to maintain coverage.

Typically 0.5-2% of portfolio annually. View it as insurance. The calculation: if tail hedge prevents 30% loss in a 1-in-10 year event, expected benefit = 3% per year. If hedge costs 1%, it's worth it.

Collect your daily returns. Simulate 10,000+ random equity paths using those returns (or fit a distribution). Calculate max drawdown for each path. The 95th percentile shows what to expect in bad scenarios.

Decompose: (1) Market = Beta × Market DD. (2) Sector = Overweight × Sector Relative DD. (3) Stock = Individual stock impacts. (4) Decisions = Did you deviate from plan? This reveals what's controllable.

They adapt limits based on conditions: (1) Volatility scaling - limits widen with vol. (2) Trend adjustment - tighter in downtrends. (3) Correlation adjustment - tighter when correlations spike. Parameters adjust automatically.