A drawdown is a period of decline in the value of a portfolio. This is where you take a number of trades, and the losses drop the portfolio at a marginal level (if you know what you’re doing).
During these times, the market is typically more volatile (jumpy) and unpredictable.
And so you have a higher chance to risk money in unfavourable times.
Risk less with drawdowns
When your portfolio drops 6%, 8% or even 11% – This is where you’re not sure when the market will become more favourable.
This is the time where you decide to risk less money per trade.
You would drop the risk from 3%, 2% to 1.5% or even 1%.
Then keep trading until the markets pick up and start to favour your portfolio…
Once you’re out of the drawdown then…
Risk more money with the winning streak
During the winning streaks, the market is typically more stable and predictable, and the chances of making a profit are higher.
You can then pump up the risk back to 2% or 3% (if you’re a risky biscuit).
When do you do this?
When your portfolio is either BACK to an all-time-high. Or when you can see the market has broken out of the sideways consolidation and volatile period.
Risk management is an important aspect of successful investing, and adjusting the amount of money being invested based on market conditions is one strategy that can help investors achieve their financial goals.
By risking less money during drawdowns and more money during winning streaks, you as the trader can lower your potential losses and maximize your potential gains.
