Reducing Position Size to Control Strategy Drawdowns

Summary

The document presents a method for moderating drawdowns by reducing the capital base used to size trades as portfolio value falls. It first defines maximum drawdown as the largest peak-to-later-trough decline relative to the earlier value. Its adjustment formula combines current equity, a prior reference peak, and a chosen reduction fraction to produce a lower sizing value; a second formula applies a buffer threshold. The worked example shows sizing from an adjusted value below current equity, thereby lowering position size after losses.

The author compares a stock-selection strategy with and without drawdown control and reports qualitatively that the adjusted version reduced maximum drawdown while slightly lowering returns. No numerical results or chart data are included in the text, and the underlying strategy uses fundamental and price-related screens with five-day rebalancing. The author notes that the remaining drawdown was still unsatisfactory and proposes using a simulated equity curve and improving the buffer. The evidence is a single described comparison, so it does not establish the method’s performance across strategies or market conditions.

Key ideas

• Maximum drawdown measures the largest decline from an earlier portfolio value to a later value as a fraction of the earlier value.
• The proposed control lowers the equity value used to determine trade size after losses.
• A buffer can delay or soften position reductions during small declines.
• The described strategy comparison reports lower drawdown and slightly lower returns, without supplying numeric results.
• The author identifies the reference equity curve and buffer design as areas for further refinement.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.