Earlier this year, I wrote an article about creating a drawdown playbook. The topic of drawdowns came up recently with one of my mentees and during a conversation I had last week with Christopher Uhl from OVTLYR.
I thought it would be helpful to write a follow-up with a little more detail and include templates you can adopt for your own playbook.
The Three Parts of a Drawdown Playbook
Identifying when the playbook is activated.
Interrupting the losing streak.
Rebuilding capital under reduced exposure.
Part 1: Identify When the Playbook Is Activated
My drawdown playbook is activated when any of the following occurs:
I have 4 consecutive losing trade ideas.
I realize $5,000 in losses within one trading week.
My account falls 10% below its high-water mark.
Whichever comes first.
Your Template for Activation:
I have ___ consecutive losing trade ideas.
I realize a loss of $___ or ___% of my account balance at the beginning of the trading week.
My account falls ___% below its high-water mark.
Whichever comes first.
I use multiple triggers because a series of smaller losses may signal that something is off before I reach my weekly loss cap, while one or two larger losses may reach the cap first. The overall drawdown threshold also prevents smaller weekly losses from quietly compounding over time.
Your high-water mark is the highest balance your account has reached based on closed trades. It excludes temporary gains or losses from open positions, as well as any withdrawals or additions to the account. It’s what I consider my realized ATH.
To calculate your activation level, multiply your high-water mark by your chosen drawdown percentage. Subtract that amount from the high-water mark.
Example
Highest realized account balance: $100,000
Drawdown threshold: 10%
Maximum drawdown: $10,000
Playbook activation level: $90,000
Record Your Balance
When your playbook is activated, record your realized account balance. This is the amount you will use to calculate your recovery progress.
Part 2: Interrupt the Losing Streak
Phase 1: Slow Down and Rebuild Confidence
Phase 1 is where you put the brakes on. You stay engaged, but reduce exposure, slow down trade cycling, and focus on increasing precision.
For the purpose of this article, X stands for the maximum capital allowed across all open positions. It is your total open exposure, and this should already be defined in the Risk Management portion of your trading plan.
Example
If my X is $10,000 and I am trading with 25% of X, my maximum total exposure is $2,500.
I remain in Phase 1 until I have three consecutive green trading days. A green day is any trading day that ends with positive realized P&L.
During this phase, I reduce my total exposure to 25% of X, hold only one trade idea at a time, and fully close the current trade before entering another. I take the full position off at the first planned profit target and exit losing trades according to my regular stop loss rules.
Template for Phase 1
Remain in Phase 1 until I have ___ consecutive green trading days.
Reduce total maximum exposure to ___% of X.
Hold only one trade idea at a time.
Fully close the current trade before entering another.
Define the first profit target before entering.
Take the full position off when the first profit target is reached.
Exit losing trades according to my original stop loss rules.
Phase 1 is designed to slow down and rebuild confidence through small, completed wins. Reduced exposure lowers the financial and emotional intensity of each trade, while holding only one position at a time allows you to focus fully on the trade in front of you.
Each winning trade is closed at the first planned profit target. There is no attempt to optimize the trade or capture the entire potential move during this phase. The path is intentionally straightforward: take one valid trade, manage it according to plan, realize the win, and repeat.
Part 3: Rebuilding Capital
Phase 2
Phase 2 begins after you complete Phase 1 and remains in place until you have recovered ___% of your initial drawdown. The gains from Phase 1 count toward the recovery total.
I stay in Phase 2 until I recover 50% of my initial drawdown. During this phase, I allow myself to use up to 50% of X, hold two trade ideas at a time, and follow my regular trade-management rules. I no longer have to take the full position off at the first profit target.
For example, if my X is $10,000, my maximum combined exposure during Phase 2 is $5,000. I can divide that $5,000 between two trade ideas, but my total exposure across both positions cannot exceed $5,000. I can remain in each trade until my regular exit criteria are met instead of taking everything off at the first target.
This phase reintroduces more of my regular trading while keeping total exposure reduced.
The Template
Maximum combined exposure across all open positions: ___% of X
Maximum simultaneous trade ideas: ___
Trade-management rules: ___
Percentage of the initial drawdown that must be recovered: ___%
Return to Regular Trading
Once Phase 2 is complete, regular trading resumes.
If You Keep Going Backwards
Your original activation conditions remain in effect throughout the drawdown playbook. If one occurs again, return to Phase 1 and restart the process.
⛔️ Caution ‼️
The repeated inability to progress is a separate diagnostic issue. If you keep returning to Phase 1 or your drawdown continues to deepen, more phases and loss thresholds will not solve the underlying problem. Your strategy may lack an edge, you may not understand the current market, your rules may be incomplete, or something psychological may still be driving your decisions.
At that point, consider pausing your trading and taking a step back. You may need to study, replay and break down your trades, review your data, talk to a mentor, or get support with the psychological patterns underneath it.
SPX Review and Outlook
This week, we saw collective selling across the indices, Dow, Nasdaq, and S&P. Will we get follow-through next week? The question for me is whether SPX breaks through the bottom of the range, or holds and rotates back up.
SPX rejected the 7,555 area again, which has been a multi-touchpoint area over the last several weeks.
SPX Daily Chart
Scenarios
Bounce Back Toward 7,555
price holds above 7,336 and starts rotating back up
from there, I’d want to see how price reacts if it gets back toward 7,555
this feels lower probability to me right now, especially after seeing broader selling across the indices, but I still want it on the map
Continue Lower Toward 7,336 / 7,237
price continues lower whether from Friday’s close or after a bounce early in the week
7,336 is the first area where price could pause or stall
if price moves through that area, 7,237 to 7,240 comes back into play
if buyers step in there, SPX could still just be rotating inside the wider range
Break the Bottom of the Range
price loses the 7,237 to 7,240 area
if sellers build on that break, this could signal a change of character from sideways to declining
For now, we’re still in a rotational market until price proves otherwise. We can have strong weeks up or down inside this range, but the bigger shift would come from breaking through one of the edges and actually following through.
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