Lesson 25 of 53
Drawdown & the recovery maths
7 min read
Chapter checkpoints
0/4- Why it matters more than the return
- The recovery maths
- How drawdown actually happens
- Keeping drawdown manageable
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Drawdown is the decline from your account's peak to a later low, expressed as a percentage. If the account reached $1,200 and later sat at $900, that is a 25% drawdown. It is the single most honest number in trading, because it measures the risk actually taken rather than the return eventually shown.
Why it matters more than the return
Two traders both end the year up 20%. One did it with a maximum drawdown of 8%, the other with 45%. They are not remotely comparable: the second was one bad month from being finished, and their result says more about luck than process.
The recovery maths
Losses and gains are not symmetrical, because a gain is calculated on the smaller balance the loss left behind. Lose 50% of $1,000 and you have $500 — making $500 back is a 100% gain, not a 50% one.
| Drawdown | Balance left from $1,000 | Gain needed to break even |
|---|---|---|
| 5% | $950 | 5.3% |
| 10% | $900 | 11.1% |
| 20% | $800 | 25% |
| 30% | $700 | 42.9% |
| 50% | $500 | 100% |
| 70% | $300 | 233% |
| 90% | $100 | 900% |
Read the bottom of that table again
The curve is flat until about 20% and then it turns vertical. Small drawdowns are an ordinary cost of doing business; large ones are a different category of problem, because the return required to escape them is one no consistent strategy produces.
How drawdown actually happens
Rarely in one trade. The usual sequence is a normal losing streak met with bigger positions to make it back faster — so the drawdown that a 1% risk would have kept at 6% becomes 40% instead. Note what that means: a run of losses is survivable, but a run of losses plus increased size is not.
| Risk per trade | After 6 consecutive losses | Gain needed to recover |
|---|---|---|
| 1% | −5.9% | 6.3% |
| 2% | −11.4% | 12.9% |
| 5% | −26.5% | 36% |
| 10% | −46.9% | 88% |
Six losses in a row is not a disaster scenario — a strategy that wins 50% of the time produces one roughly every hundred trades. Your risk per trade decides whether that ordinary event is a bad fortnight or the end of the account.
Keeping drawdown manageable
- Fix risk per trade at 1% or less and never increase it after a loss. This is the entire mechanism.
- Set a maximum monthly drawdown — many traders use 6–10% — and stop trading for the month when it is hit. The strategy has not stopped working; you need the distance.
- Track peak equity and current equity in your journal so you always know where you are relative to the high-water mark.
- Recover with the same size you always use. Trying to recover faster is the reason the drawdown got large in the first place.
- Measure drawdown on equity, not balance — floating losses on open trades count.
The link back to position sizing
Drawdown is not something you manage after it appears. It is decided in advance, one lot size at a time. Position sizing and a risk-per-trade limit are the only two controls that exist — everything else is hope.
Keep your drawdown in the flat part of the curve
Work out the lot size that keeps every loss at 1% so a losing streak stays an inconvenience.
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