Cap ruin and drawdown before optimal-f

Loss control is not the same as allocation

Loss control and capital allocation are separate decisions. One measures loss probability and stop location. The other decides how much total equity, per-trade cash, and leverage to put at risk.

A recorded history of average dollar and percent drawdown over about 12 months, plus how much is made per dollar lost, is used to judge how much leverage a book may carry.

What sits inside a drawdown-limit

After a 20% decline, a 25% gain is required to return to even. After a 25% decline, about 33.33% is required. After a 50% decline, more than 100% is required, before slippage or commission.

Drawdowns of 25% or 30% of available trading capital are treated as outside a durable limit. The working standard described is a low percentage drawdown on that capital. The drawdown-limit is a precommitted ceiling on dollar or percent equity decline that a size plan is not allowed to breach.

Recheck the cash-risk budget

When volatility or trend structure changes, the original cash-risk budget must be rechecked before staying in, because remaining can require a larger loss allowance than the entry plan set.

Cap ruin before optimal-f

Optimal-f is a growth-maximizing fraction that pyramids into winners and tends to produce steep equity swings and large drawdowns. Optimal-f and pyramiding add size into winners, produce near-parabolic equity paths, and create large drawdowns few operators can sit through.

A fixed-fractional-reserve that holds 80% of equity in reserve and risks 20% is used to keep a losing streak from consuming the whole book.

Leverage, time, and the physical-stop

Leverage above a factor of two, and stacking margin with other leveraged vehicles, is described as a path that can wipe an account even after consecutive wins. Risk-of-ruin is the chance that a losing streak, oversized leverage, or an unplaced exit consumes equity past a point the book cannot recover from.

Time in a position raises risk, and after about 12 days the increase becomes more parabolic, so shorter-horizon exposure is easier to keep inside a bound. That rise is time-scaled-risk.

Overnight holdings require physical stops. A physical-stop is an actual exit order placed in advance, used especially when a position is held overnight. A planned but unplaced exit is typically abandoned once price reaches that level.