Expectations and the big picture
The math of a drawdown
Lose 50% and you need 100% to get back. This one asymmetry explains why professionals obsess over losses, and why survival comes before returns.
The most important table in trading fits on a sticky note.
| Account loses | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
| 90% | 900% |
A loss shrinks the base you're recovering from. The deeper the hole, the steeper the climb. At 10% it's barely noticeable. At 50% you need to double what's left. At 90% the account is effectively finished.
Time makes it worse
Take the hypothetical trader from our realistic year, earning about 10% annually. A 30% drawdown would take nearly four years to recover at that pace. A 50% drawdown would take about seven. One bad month can erase years of steady work.
Why traders go deeper
The table also explains a trap. After a big drawdown, normal returns look useless, so traders take much bigger risks to speed up the recovery. The higher risk makes a further loss more likely, which makes the climb steeper again. Trying to escape a drawdown quickly is how many drawdowns become terminal.
How to use this
- Size so a losing streak stays shallow. Ten straight losses at 0.5% per trade costs about 5%. At 5% per trade it costs about 40%.
- Set a daily limit. It stops one bad session from becoming a bad year.
- Set a maximum drawdown. Decide in advance when you reduce size or stop to review.
- Cut size during a drawdown. Going smaller feels wrong and is usually right. Your priority has shifted to staying in the game.