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Peak-end rule

Remembering an experience mostly by its most intense moment and its ending, which distorts how you recall a trading day or a whole month.

Memory is not an average. A session with one terrifying drawdown and a flat finish is remembered as a disaster even if it ended green. A month that closed with three wins is remembered fondly even if the middle was a mess.

This matters because you set next week's behaviour from a remembered summary, not from the data. Traders often reduce size after a month that was statistically fine but ended badly, or raise size after one that ended well and was otherwise poor.

Let the records, not the feeling, set the parameters. A simple end-of-month sheet with expectancy, max-drawdown, and rule adherence overrides a distorted memory.

Related: availability-heuristic, outcome-bias

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

An equity curve and its drawdownAn account balance rising over a year, falling from a peak to a trough, then climbing back to the old peak.ACCOUNT EQUITY$20k$12k$8k024681012TIME (MONTHS)PEAK $16,000TROUGH $12,000DRAWDOWN−25%RECOVERY
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.

Educational only, not advice. Spotted an error? Post in Site Feedback.