How it works
After a loss you are trading a smaller account, so every percent is worth less. The required recovery grows faster than the drawdown: −10% needs +11%, −30% needs +43%, −50% needs +100%.
This is the strongest argument for small risk per trade. At 1% risk, ten losses in a row cost under 10%. At 5% risk, the same streak costs 40%.
Formulas
- Required gain = 1 ÷ (1 − Drawdown) − 1
- Drawdown after n losses = 1 − (1 − Risk per trade)ⁿ
- Winning trades to recover ≈ ln(1 ÷ (1 − DD)) ÷ ln(1 + Risk × Avg win R)
Questions traders ask
What drawdown is too much?
That depends on you, but past about 20 to 25% most traders start breaking their own rules to win it back. Decide your maximum drawdown before it happens.