Max Drawdown

As I always say, risk management and trading psychology are the two most important concepts (as per me) to win big in stock market. In fact, they are more important than strategy itself. You can end up in profits even with a not-so-good strategy if your risk managements concepts are good but conversely, even if have a market-beating strategy you will end up in loss if your risk and money management concepts are mediocre. So, mastering these topics are extremely important if you want to continue your journey in stock market for long term.

And so, I decided to write down this post on Maximum Drawdown which falls right under risk management. I focus on 3 main topics in this post.

1. What is Drawdown and what’s difference between drawdown and max. drawdown (MDD)?
2. What if we don’t care about drawdown?
3. Some ways through which we can reduce drawdown to certain extent.
   1. At strategy level
   2. At portfolio level

Before I get into the concept, I want to reassure that I include these important concepts in both our strategies – ISS (for intraday option traders) and PDR (for short term equity trading) because of which our drawdowns always stay within our limits.

Here’s part 1 which includes first and second topics aforementioned.

Here’s part 2 that explains some ways to reduce drawdown at both strategy level and portfolio level