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Equity Curve Rules, Trade Smaller When You're Out of Sync

Your equity curve, the line showing your account balance over time, can be more than a record. Some traders use it as a feedback tool to adjust risk.

The idea: when your results are trending down, your trading may be out of sync with the market or with your own discipline. Reducing risk during those periods protects you. When the curve recovers, you return to normal size.

A simple rule set:

1. Choose a reference. For example, a 10-trade or 20-trade moving average of your equity.

2. If your equity is above the average, trade normal size.

3. If your equity is below the average, cut risk by half, or trade only A+ setups.

4. When equity moves back above the average, return to normal risk.

Alternative approach based on drawdown:

- Down 5% from peak: reduce risk by 25%
- Down 10%: reduce risk by 50%
- Down 15%: stop trading and review

Benefits:

- Limits drawdown depth
- Encourages reflection when things go wrong
- Reduces emotional pressure

Drawbacks:

- You may trade small during a recovery
- Rules can be arbitrary without testing

Test such rules in your journal data before using them. Ask: would this have improved my results and calmed my nerves?

A good risk plan responds to reality, not to hope.

One way to make this concrete: plot a 20-trade moving average of your equity curve. When the actual curve sits under that average, cut risk in half. When it climbs back above, go back to normal size. It's crude, but it stops you from pressing full size through a cold patch.

Fairman wrote: Rules can be arbitrary without testing

Testing these is easier than it sounds if the journal has R values per trade. Replay the trade list with the rule applied, halving R whenever equity is below its 20-trade average, and compare the final total and the deepest drawdown with the original. For many strategies the drawdown shrinks noticeably while the total barely changes, which is a decent trade-off. For others the rule cuts size right before the recovery and leaves you worse off.

One thing I'd check alongside it is what caused the dips. If most of them came from a few weeks of heavy central bank news, reducing size on those weeks might do the same job more directly than reacting to the curve after the damage is done.