Skip to main content
Track Drawdown limit
1 / 22
Search the archiveLibrary
Library

1992issue C051-6

Probability stops from winning-trade drawdowns

Risk management is framed as capital-conservation by exiting before an open unrealized-loss grows too large. Unrealized-loss patterns on past winners set a probability-stop, so the same dual-moving-average-crossover can be kept while the loss is bounded before entry and throughout the trade.

  • Capital-conservation means exiting before an open unrealized-loss becomes too large, rather than holding only in hope of recovery.
  • A probability-stop is a drawdown-cutoff-rule taken from the unrealized-loss pattern of historically profitable trades.
  • Larger open equity-drawdowns coincided with fewer eventual winners across the examined dual-moving-average-crossover sets.
  • The stop is presented as a capital circuit-breaker, not a profit maximizer, because it can reduce a losing system's damage and can either raise or reduce an already profitable one.
Entries in this reading3 entries
Current trackDrawdown limit68 readingsMoving-average crossover126 readingsStop-loss order297 readings

A bound on the open loss

Risk management is framed as capital-conservation by exiting before an unrealized-loss on an open trade becomes too large.

An equity-drawdown is a reduction in open-trade equity. It shows up as a smaller unrealized profit or as a larger unrealized-loss versus the entry price.

When open equity declines, the decision is between liquidating to bound the loss and holding in hope of recovery, while trying not to exit a trade that would later work.

When fixed parameters stay constant

A fixed-parameter-system keeps either the historical lookback window or the size of a price reversal constant.

Because trend size and timing vary, those rules are treated as imperfect, so unrealized-loss patterns on past winners are used to set probability-stops.

The working assumption is that a larger unrealized-loss makes it less likely the trade will recover and finish as a winner.

A probability-stop is a drawdown-cutoff-rule set from the unrealized-loss distribution of historically profitable trades. It is used to exit when a live trade exceeds that bound.

Keeping the same crossover signal

A dual-moving-average-crossover buys when the shorter average exceeds the longer one and sells when it falls below.

After a stop, post-stop-neutrality applies: the system stays flat until a fresh opposite crossover appears.

Larger drawdowns and fewer later winners

Across the five markets and four crossover pairs examined, larger open equity-drawdowns coincided with fewer eventual winners, so losing trades outnumbered winners at high unrealized-loss levels.

On historically losing live-cattle and S&P 500 crossover sets, adding a drawdown-based probability-stop reduced the loss, and in some cases turned a no-stop loss into a profit.

When the underlying crossover was already profitable, adding drawdown-cutoff-rule stops sometimes raised results and sometimes reduced them, so the stop is presented as a capital circuit-breaker rather than a profit maximizer.

A circuit-breaker for capital-conservation

The aim remains capital-conservation: bound an open loss so a deteriorating trade cannot keep expanding unrealized damage.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
1 of 22 in the Drawdown limit track
19941-5 pp.Next on Drawdown limitMonthly drawdown limits when cash competes with equityAcross 344 months from January 1965, 83% of months on the cash large-cap index posted some decline from the prior month-end close, so a monthly-drawdown bound belongs on that close-to-low path rather than on the month-end print.
All readings on this track · 22 readings
  1. 1992Probability stops from winning-trade drawdowns
  2. 1994Monthly drawdown limits when cash competes with equity
  3. 1994Keep constant leverage left of the equity peak
  4. 1995Evaluate mechanical systems as a three-way fit test
  5. 1997Limits as a single trading decision procedure
  6. 1998Drawdown limits before a trend system is allowed to trade
  7. 1998Evaluating trailing stops as two-parameter loss filters
  8. 1998Walk-forward evaluation of a noise-filtered bond-futures breakout
  9. 2002The pattern-day-trader equity floor as a leverage governor
  10. 2003Evaluating a one-rank mutual-fund switch
  11. 2004Keep entry, exit and abstention balanced as one procedure
  12. 2006A stated daily multiplier is a risk contract, not a return promise
  13. 2007Walk-forward probation for intraday systems
  14. 2008A mechanical futures procedure is unfinished without a drawdown limit
  15. 2010Evaluating mechanical index timing under drawdown limits
  16. 2013Predefined small losses outrank market analysis
  17. 2013Equity-curve filters as drawdown brakes
  18. 2014Critique of chasing recovery after a large drawdown
  19. 2015Loss thresholds and equilibrium as trade filters
  20. 2015Constructing mechanical systems under a drawdown cap
  21. 2018Evaluating system rules for robustness and livable drawdowns
  22. 2020Regime-aware equity halts and volatility entry filters
By fieldStops and loss limits76 readingsBy year1992153 readings
All 68 readings tagged Drawdown limit
Also on Drawdown limit5 readings
1991Bound losses with MAE, stops, and drawdown limits1998Evaluating trailing stops as two-parameter loss filters2002A constant percent risk bound beats a higher win rate2013Predefined small losses outrank market analysis2014Critique of chasing recovery after a large drawdown