Trading Risk Management and Drawdown Review

Define initial risk consistently

Initial risk is the amount assigned to the original trade plan. Record how it is calculated and which costs are included. If an exit fills beyond the planned stop, the actual loss can exceed that planned amount. A stop level describes an instruction; it does not guarantee the fill price.

Use initial risk to normalise outcomes in R, and retain actual currency outcomes as well. Recalculating R after changing a stop can hide the difference between the original plan and the decision that was executed.

Check combined exposure

Several trades can respond to the same market move. Counting each position separately may miss concentration across related instruments, directions or sessions. Record overlapping positions and examine the combined result rather than assuming that different symbols imply independent risk.

A simulated exercise can define its own session loss and stopping rules. Keep those definitions visible in the journal so that the review can distinguish a rule violation from an ordinary losing outcome.

Measure drawdown using a defined series

State whether drawdown is measured from closed-trade balance or marked-to-market equity. Specify how often observations are taken and how cash flows are handled. Different series can produce different maximum drawdowns for the same account.

See drawdown and recovery mathematics and use the drawdown calculator for an illustrative calculation. A historical drawdown does not set an upper bound on future losses.

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