The maths of drawdowns

Lose 50% and you need to make 100% to get back.

Losses and gains are not symmetrical

A drawdown is the fall from a peak in your account to a low. The problem is that you recover from a percentage loss with a larger percentage gain, because you are growing a smaller base:

Gain needed = 1 ÷ (1 − loss) − 1

Small drawdowns are cheap: 10% needs 11%. Past about 30% the curve turns vicious, and past 50% you need to double the account.

Streaks are guaranteed

A method that wins 40% of the time will, over 100 trades, almost certainly produce a run of six or more losses in a row at some point. Nothing has broken; that is what a 40% coin does. Over 1,000 trades, a streak of ten is likely.

Your risk per trade has to assume that streak will happen, because it will.

Try it

Risk per trade: Win rate: Reward-to-risk:

Run 100 trades again

Final balance

Worst drawdown

Longest losing streak

Each run uses the same settings with different luck. Run it several times: the shape changes, the drawdowns don't go away.

Notice how the curve ends somewhere different every run even though nothing changed. Then push the risk to 8% and watch how often a perfectly good method goes broke on bad luck alone.

The number to watch is the worst drawdown, not the final balance. Choose a risk per trade whose worst drawdown you could sit through without changing your method. For most people that is 1–2%.

Quick check

1. Question 1 of 3

   After a 25% drawdown, what gain brings the account back to its peak?

   A25%B33%C50%

Go deeper: Drawdown in Trading: What It Is and How to Recover From It · Is Forex Trading Profitable? An Honest Look at the Numbers