Risk Per Trade and Maximum Drawdown

Look at three outcomes for the same position. Selling at the planned ₹60 loses ₹2,700 after rough charges. A later sale at ₹40 loses ₹4,000. That is more than the plan, though still under the account allowance. If the Call expires with no exercise value, you lose ₹6,600, which is above the allowance.

For a bought cash-settled index option, the option loss itself cannot go beyond the ₹6,500 premium, because the exercise receipt cannot be negative. Charges come on top. The ₹100 of charges here is a rough estimate for each finished case, not a tariff or a limit. The smaller planned loss depends on how your sale executes, and writing an allowance down does not make the sale happen at ₹60.

This is a separate account with six marks in order. They include open positions and costs, and no money is added or taken out. At observation 2, equity is ₹4,40,000 after a ₹5,50,000 peak, a decline of 20%. A later high of ₹5,70,000 cannot be paired with that earlier low. At the last mark, ₹5,13,000 is 10% below the new peak, while the deepest drawdown seen is still 20%.

Recovery uses the smaller base. To go from ₹4,40,000 back to ₹5,50,000 takes a 25% gain. A 20% gain only reaches ₹5,28,000, which is still 4% short. This is arithmetic, not a prediction that recovery will happen.

A real report names its dates, how often it samples, how it values positions and how it treats costs. Closing marks can miss a fall during the day, and a ledger of closed trades leaves out unrealised changes. A past maximum drawdown describes the past. It is not a ceiling for future losses. Zero or negative equity needs separate treatment, not an ordinary recovery percentage.

The first period loses 10%, so the index falls to 90. The deposit lifts the balance from ₹4,50,000 to ₹5,50,000, but the index stays at 90. The next period gains 10%, which takes the index to 99. The current drawdown is still 1%, and the largest seen is still 10%, even though the balance ends at ₹6,05,000.

Deposits or withdrawals at other times need their actual dates and a value for each sub-period, so this end-of-period shortcut cannot be reused as it is. A withdrawal carries a negative sign. Keep the raw balances and the performance index together in your record. This index is a teaching tool and does not claim to meet any formal investment performance standard.

After trial 5, the drawdown is about 9.61%, so trial 6 still risks 2%. That loss takes equity to ₹4,42,921.19, a drawdown of about 11.42%. The threshold is now crossed, but the smaller allowance starts at trial 7. It cannot shrink trial 6 after the fact. After trial 12 both paths are below the start, and the one with smaller later allowances keeps more money in this all-loss sequence.

Smaller size also means smaller gains when trades win. This comparison gives no probability of loss and no proof that one rule is better in future. In practice, moves between your checks, open orders and poor exits can lose more than a trigger intends.

Write the restart conditions beside the trigger. Reconcile equity, fills, pending orders and exposure, review any breach of the plan, and record the new allowance and the time it starts. Using different levels to enter and to leave the reduced state stops you flipping at one line. The values are your own policy choices. A pause limits new risk, but open positions, exits, funding and settlement still need your attention. A deposit or one good trade does not show the reason for the pause is gone. Keep the full loss history after any review.

The allowances total ₹12,250, which is 2.45% heat on ₹5,00,000. In this scenario the spread gains ₹1,300 and offsets part of the other losses, so the net result is −₹10,700, a 2.14% loss. Keep its positive sign. That gain does not cancel its allowance, and neither total is a cap on loss. Putting together worst cases that cannot happen in the same market answers a different question.

The matched Call credit spread sells a lower-strike Call and buys a higher-strike Call, same underlying and expiry, equal quantity. It usually leans neutral to bearish, while a bought Call leans bullish, if other inputs stay fixed. Contract type and profit or loss are separate things. Different names on a ledger do not prove diversification. Margin, eligible collateral, premium cash and settlement funds need their own checks, and collateral is neither a planned loss nor a cap on loss.

Net R is the signed net result divided by the rupee loss you planned on the original filled position, with the cost rule stated. The separate ₹40 sale gives −₹4,000 against a ₹2,700 plan, which is about −1.48R. Changing the divisor after the loss would hide that you went past your plan. R is not the same as the ₹5,000 account allowance, and it is not an account return.

For real trades, match each fill and booked charge to the account statement. Record the units left after partial exits, marks with their time, the timing of any deposits and the status of pending orders. A request to cancel is not a confirmation that the order is cancelled, and a mark is not a promised sale price. Write unknown for what you do not know. Do not turn it into zero.

Before you change a rule, review the surprises in execution, the times you left the plan and any inputs that changed. Keep the earlier rule version and judge later results apart from the data you used to pick the change. A profit does not prove a good process, and a loss alone does not show the cause. The next lesson extends this idea: a position can look protected while obligations remain.