Drawdown is the fall from a peak in your account balance to a later low — the pain you actually feel while a strategy works through a rough patch. A maximum-drawdown threshold decides, in advance and in calm, how deep that fall is allowed to get before the bot stops and asks for a human. Setting it beforehand means you never discover your limit by blowing past it.
Why drawdown, not just daily loss
A daily loss limit caps a single day. Drawdown is the cumulative picture: a series of small, individually acceptable losses can still grind an account down well past your comfort over a week or a month. The drawdown threshold watches that running total against your high-water mark, catching slow bleeds that daily limits let through.
Step by step
- Define peak-to-trough pain. Decide the largest fall from a high-water mark you are willing to sit through, expressed as a percentage of the account.
- Set it as a hard threshold. Enter that figure as a maximum-drawdown limit the bot tracks continuously against its peak balance, not against your starting balance.
- Choose the response. Decide whether hitting the threshold pauses trading for review or triggers the kill switch outright. Deeper thresholds usually warrant the harder response.
- Review against history. Check past drawdowns in the audit trail to confirm your threshold is realistic for how the strategy actually behaves, not just a number that sounds brave.
Picking a number you will honour
A threshold set too tight stops a perfectly normal strategy during ordinary variance; set too loose, it fails to protect you when it matters. The honest test is whether you would still respect the number during the drawdown, not just while writing it down. A threshold you will override the moment it bites is not a threshold — it is a suggestion.
Drawdown control sits above your other limits: configure those in per-trade and daily risk limits and a consecutive-loss cooldown. When the threshold escalates to a stop, see the emergency kill switch, explained.