Capital Preservation: Protecting Your Base
Implements protective measures during drawdowns, reducing risk exposure to preserve capital for recovery.
Why Capital Preservation Matters
The first rule of trading is to protect your capital—without it, you can't trade. Mathematics works against you during drawdowns: a 50% loss requires a 100% gain to break even. Capital preservation strategies recognize when things aren't working and reduce exposure to survive the storm, ensuring you have capital to deploy when conditions improve.
Key Principles
Drawdown limits: Maximum acceptable portfolio decline. Risk reduction: Decrease position sizes during losing periods. Cash reserves: Move to sidelines when conditions are unfavorable. Recovery focus: Preserve enough capital to recover. Emotional protection: Reduce stress during difficult periods.
Implementing Drawdown Rules
Set clear rules before you start trading. For example: reduce position sizes by 50% when down 10% from peak equity; reduce by 75% when down 15%; stop trading entirely when down 20%. These rules should be automatic and non-negotiable. The goal is to ensure you always have capital available when good opportunities return.
Recovery Mode
When emerging from a drawdown, don't immediately return to full position sizes. Gradually increase exposure as you prove your edge is working again. A common approach is to stay at reduced risk until you've recovered at least half the drawdown with the smaller positions, confirming your strategy is back in sync with the market.
Practice Risk-Free
Master these concepts with paper trading before risking real capital.
Start Paper TradingDisclaimer: This article is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss. Cryptocurrency investments are volatile and high-risk. Always do your own research before making any investment decisions.