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Control Drawdown

This money management method allows risk-averse traders to have good control over their equity drawdowns. The idea of the technique is to not let drawdown exceed some value that a trader can tolerate. The formula is:

Position size = % Risk * (Equity – (1 – Max DD %) * Highest Equity) / initial risk per share / 100

Initial risk per share is expressed in units of volatility (e.g., 0.50 * 14-day ATR). Consequently, the initial risk taken when creating a position is equal to a fixed fraction of maximum allowed equity drawdown.


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