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My trading returns is about 50% monthly(alpha) and maximum drawdown is about 20%. Is there a mathematical way to define the optimal withdrawal rate X%(say when profit level reach y%) to avoid risk of 50% ruin? i.e. how to find X% & y% for the best balance between risk vs compounding rate? For e.g, withdrawing 50% of monthly profits if quarterly max drawdown is 25% and compound the rest of the profits... simplified Withdrawal rate =the inverse of calmar ratio.

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  • $\begingroup$ Assuming your return and drawdown are independent of how much you allocate into the strategy, you will have to come up with a utility function that measures how much risk you are willing to take given your current wealth. $\endgroup$ – Pontus Hultkrantz Jan 14 at 11:47
  • $\begingroup$ Thanks for the reply. This is my day trading account which is 33% of my funds that I am willing to risk half of it before I halt trading completely. I was thinking something simpler like monthly withdraw, W=D/R % of monthly profits where D is maximal drawdown and R is monthly return. How do you create this utility function graph? $\endgroup$ – Gazillionaire Jan 14 at 18:07
  • $\begingroup$ In other words, how to find this utility function equation to avoid 50% drawdown based on average monthly return and current maximum drawdown without ambiguous inputs like winrate and target/loss ratio? $\endgroup$ – Gazillionaire Jan 15 at 7:32

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