A drawdown ceiling for the month that forces a full strategy review rather than another attempt at a comeback.
Monthly limits operate at the strategy level. By the time a month is down 10%, the question is no longer about discipline in the moment; it is whether the edge is still there.
A useful pairing is a limit plus a mandatory action. Example: at minus 8% for the month, size halves for the remainder; at minus 12%, trading stops until a written review is complete. The written part matters because it converts a feeling into a comparison - hit rate, payoff-ratio and expectancy this month versus the trailing twelve.
Be honest about the arithmetic of recovery. A 12% monthly loss needs 13.6% to get back; a 25% loss needs 33.3%. See drawdown-recovery-maths. Limits exist because those numbers get bad faster than intuition expects.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.
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