How to Behave in a Deep Drawdown
A deep drawdown poses a question with no universal answer: has the system stopped working, or is this its normal behaviour? You can be wrong in both directions, and both errors are expensive.
Two ways to be wrong
The first is abandoning a working system at the bottom of its normal drawdown, locking in the loss just before recovery. The second is continuing to trade a system that genuinely has broken, explaining the losses as a bad run. The symmetry is deceptive: the first error costs forgone profit, the second costs the rest of the deposit.
How to tell them apart
The only way is to compare the current drawdown against the expected one, calculated in advance. If you knew before trading that the system had endured drawdowns of this depth and duration, what is happening is normal. If the current one has exceeded the historical bounds or lasted longer than anything before, that is a different question. The practical conclusion: the expected drawdown figures must be known before it arrives, because during it your judgement will be distorted.
Why not to change the system at the bottom
Decisions taken in a drawdown are systematically biased toward avoiding pain rather than toward the mathematics. Changing systems at the bottom usually means switching to whatever has performed well recently — that is, buying the recent past. That is not an improvement but a chase, and its outcome is known in advance.
The order of actions
Three steps, in this order. Reduce size — that lowers both the loss and the emotional pressure without changing any rules. Check execution: whether the rules were actually followed, because more often than not a drawdown deepens through deviations rather than through the system. And only then, away from the trading process and with a clear head, reconsider the system itself — if there are grounds beyond the mere fact of losing.
This material is educational and is not individual investment advice. Trading forex carries the risk of losing capital.
Frequently asked questions
How do I know whether my system is broken or just in a drawdown?
Compare the current drawdown with the historical one by depth and duration. If it has exceeded anything seen before, that warrants analysis. The figures must be known in advance — during a drawdown judgement is distorted.
Can I change my system during a drawdown?
Not at the point of maximum pain. Decisions at the bottom are biased toward avoiding discomfort and usually lead to adopting whatever worked recently — buying the past.
What should I do first in a deep drawdown?
Reduce size, then check whether the rules were actually followed. Drawdowns deepen through deviations from the system more often than through the system itself.
New backtest studies — to your inbox
When a new reproducible study comes out or the data is updated, we send a short email. No spam, no "signals", no selling your address.
By leaving your email you agree to receive occasional emails from the portal. Unsubscribe in one click from any of them.