Drawdown and the Mathematics of Recovery
Losses and gains are not symmetric. The deeper the drawdown, the harder the climb back becomes.
Losses and gains are not symmetric. A 50% loss requires a 100% gain to get back to where you started, and that asymmetry is the reason drawdown control matters more than return optimisation.
Most traders size their risk based on the returns they want. It should be sized based on the drawdown they can actually tolerate without abandoning the method.
The recovery table
The relationship is simple arithmetic that surprises people anyway. To recover from a loss of L, you need a gain of L divided by (100 − L), expressed as a percentage.
A 10% loss needs about 11% to recover. A 20% loss needs 25%. A 50% loss needs 100%. A 70% loss needs 233%. The deeper you go, the steeper the climb becomes, and it accelerates.
Drawdown should set your risk
Work backwards instead of forwards. Decide the maximum drawdown you could tolerate and still follow your rules — for most people it is far smaller than they imagine — then choose a per-trade risk that makes exceeding it unlikely.
A strategy risking 2% per trade with a historically normal losing run can easily see a 30–40% drawdown. If that number would make you quit or change method, then 2% is too much for you, regardless of what the maths of expectancy says.
The compounding trap
Sizing a fixed percentage of current equity means position size shrinks automatically as the account falls. That is protective, and it also means recovery from a drawdown is slower than people expect.
The dangerous alternative is sizing off peak equity or starting equity. It keeps position size constant during a drawdown, which feels disciplined and is in fact the opposite: you are risking the same dollar amount on a smaller account, so your effective risk percentage is rising exactly when you can least afford it.
Compound Calculator
Projected Capital Growth
Drawdown duration matters as much as depth
A 20% drawdown recovered in three weeks is a different experience from a 20% drawdown lasting fourteen months. The second one is what ends trading careers, because it erodes confidence long before it erodes capital.
When you evaluate a strategy, look at the longest drawdown period as well as the deepest. A method you can tolerate is one whose worst historical stretch you would genuinely have sat through.
What each loss actually requires to get back to break even
| Loss | Gain required to recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
| 70% | 233% |
| 90% | 900% |
Key takeaways
- A 50% loss needs a 100% gain; the asymmetry accelerates as losses deepen
- Size risk from the drawdown you can tolerate, not the return you want
- Risking a percentage of peak equity during a drawdown raises your real risk
- Judge a strategy by its longest drawdown, not just its deepest
- A 50% loss requires a 100% gain just to break even
- A 20% loss requires a 25% gain to recover
- Maximum drawdown should drive your maximum risk per trade
- Compounding works in reverse when you size off a shrinking balance
Sizing risk as a percentage of peak equity instead of current equity during a drawdown.
Reading is not verification
Take the concept you just read and turn it into explicit rules, then test it. That is the only way to know whether it actually works.
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