drawdown-playbook

id	drawdown-playbook
name	drawdown-playbook
description	Drawdown taxonomy, tiered response protocols (caution to emergency), equity curve health analysis, recovery mathematics, and pre-drawdown preparation. Use for drawdown, equity curve, max drawdown, recovery protocol, drawdown management, or any drawdown-related analysis.
title	Drawdown Playbook
domain	trading/risk-and-portfolio
level	advanced
version	1
depends_on	["risk-of-ruin"]
unlocks	["real-time-risk-monitor","risk-of-ruin"]
tags	["drawdown","recovery","equity-curve","max-dd","protocols"]
status	active
created	2025-01-15
updated	2025-01-15
context_cost	medium
load_priority	0.8
kind	reference
category	trading/risk

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

Type	Definition	Typical Cause
Strategy DD	Expected drawdown within strategy parameters	Normal variance
Behavioral DD	Drawdown from rule violations	Revenge trading, FOMO
Regime DD	Drawdown from regime change	Strategy-regime mismatch
Black Swan DD	Drawdown from extreme events	Flash crash, gap, liquidity vacuum

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

3. Equity Curve Analysis

Health Indicators

HEALTHY EQUITY CURVE:
✓ Drawdowns are shallow relative to advances
✓ Recovery time < 2× drawdown duration
✓ New equity highs every 20-40 trades
✓ Ulcer Index < 5%
✓ Consistent slope (not spike-dependent)

DETERIORATING EQUITY CURVE:
✗ Drawdowns deepening over time
✗ Time between new highs increasing
✗ Equity curve flattening (winners shrinking)
✗ Large gap between gross and net P&L (overtrading)

Rolling Performance Windows

def equity_health_check(trades: list[Trade], window: int = 50) -> dict:
    """Run on last N trades to detect deterioration early."""
    recent = trades[-window:]

    metrics = {
        'win_rate': len([t for t in recent if t.pnl > 0]) / len(recent),
        'avg_r': mean([t.r_multiple for t in recent]),
        'max_dd_pct': max_drawdown(recent),
        'profit_factor': sum(wins) / abs(sum(losses)),
        'expectancy': win_rate * avg_win - (1 - win_rate) * avg_loss,
        'sqn': (avg_r / std_r) * sqrt(len(recent)),  # System Quality Number
    }

    # Compare to full history
    baseline = compute_metrics(trades)

    alerts = []
    if metrics['win_rate'] < baseline['win_rate'] * 0.85:
        alerts.append('WIN_RATE_DEGRADATION')
    if metrics['avg_r'] < baseline['avg_r'] * 0.75:
        alerts.append('R_MULTIPLE_COMPRESSION')
    if metrics['max_dd_pct'] > baseline['max_dd_pct'] * 1.5:
        alerts.append('DRAWDOWN_EXPANSION')
    if metrics['sqn'] < 1.6:
        alerts.append('SYSTEM_QUALITY_LOW')

    return {'metrics': metrics, 'alerts': alerts}

4. Recovery Protocols

Mathematical Reality of Recovery

Loss    Required Gain to Recover
─────   ────────────────────────
  5%    →   5.3%
 10%    →  11.1%
 15%    →  17.6%
 20%    →  25.0%
 25%    →  33.3%
 30%    →  42.9%
 50%    →  100%    ← Point of no practical return

Recovery Rules

1. Never try to recover fast. Increasing size during drawdown accelerates ruin.
2. Recovery position size = Normal size × (1 - DD%/MaxAllowableDD%)
3. Track recovery separately. When equity returns to 95% of peak, you're "recovered."
4. Time-based recovery. After emergency stop, require N profitable paper trades before live.

5. Pre-Drawdown Preparation

Account Structure

Total Capital: $X
├── Trading Account: 60-70% of X
│   ├── Active margin: ≤50% of trading account
│   └── Reserve: ≥50% as buffer
├── Opportunity Reserve: 20-30% of X
│   └── Deploy only in high-conviction setups after drawdown recovery
└── Emergency Fund: 10% of X (NEVER trade this)

Pre-Commitment Device

Write this BEFORE you start trading, sign it, review monthly:

My maximum account drawdown is ____%
At ____% DD I reduce size by ____%
At ____% DD I stop trading for ____ days
I will not increase size during drawdown
I will not add funds to cover drawdown (throwing good money after bad)

6. Drawdown Journaling Template

## Drawdown Event: [DATE]

**Current DD:** ___% | **Level:** 1/2/3/4
**Duration:** ___ trading days since peak
**Peak Equity:** $___  |  **Current Equity:** $___

### What happened?
- [] Normal strategy variance
- [] Regime change
- [] Rule violation
- [] Unexpected event
- [] Overtrading
- [] Position sizing error

### My mental state:
- [] Calm, following protocol
- [] Frustrated but controlled
- [] Anxious, wanting to make it back
- [] Tilted / revenge trading impulse

### Actions taken:
1. ___
2. ___
3. ___

### Review date: [DATE + 3 days]

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Related Skills

• Risk And Portfolio
• Correlation Crisis
• Risk Of Ruin
• Real-Time Risk Monitor