foundations · TRADING LEARNING GUIDE
Drawdown and exposure
What is this concept?
Drawdown is a decline from peak equity. Exposure describes positions, leverage and shared risks. After loss fraction d, recovery requires d/(1−d); this is arithmetic, not a promise.
Step by step
Separate cashflows and costs from mark-to-market equity. Track the running peak. Consider common factors, currency and gap scenarios; historical correlations may change in stress.
From observation to decision
Record the instrument, venue, session and timeframe. Classify the observation using the definition, then write at least one alternative interpretation. Decide what evidence would invalidate your idea before entry. Mark missing information explicitly. Examples are hypothetical. Collect paper observations, including failures. Include fees, spread, slippage and timestamp alignment when measuring outcomes. Recognizing a chart shape and establishing a profitable trading rule are separate tasks.
Worked example
Equity falling from 100 to 80 loses 20%; returning to 100 needs 25%. Different tickers can still share a market factor, limiting diversification.
Common mistakes and limits
Avoid looking only at closed trades, treating margin as maximum risk or assuming an untested hedge removes downside.
Practice
For equity 100,110,95,105,90 calculate each running peak and drawdown. Define pause and review conditions in advance.
Resources and further reading
These sources explain definitions and underlying mechanics. Worked examples are original illustrations; a source does not establish the profitability of a custom pattern.
Further reading / foundational context. Worked examples on this page are original illustrations, not source performance claims.