There is simple arithmetic people forget the moment an account goes into the red: a loss and the gain needed to recover it are not equal. After losing 50% of a deposit, a 50% gain will not bring it back.

Why. If the account held 1000 and you lost 50%, 500 is left. To get back to 1000 you need to earn 500, which is already 100% of the current 500. The general formula: after losing L%, the required gain is L / (100 - L) * 100%.

Here is how fast the cost of recovery grows:

  • Lose 10%: need +11.1%
  • Lose 20%: need +25%
  • Lose 30%: need +42.9%
  • Lose 50%: need +100%
  • Lose 70%: need +233%
  • Lose 90%: need +900%

The relationship is nonlinear. Up to a 20% drawdown, recovery is realistic. After 50% you are playing a different game: to break even you have to double what is left, and for many that takes months or years.

That is why risk per trade matters. A run of 10 losing trades in a row, at different percentage risk per trade (of current equity), gives:

  • 1% per trade: a drawdown of about 9.6%
  • 2% per trade: about 18.3%
  • 5% per trade: about 40.1%
  • 10% per trade: about 65.1%

A run of ten losses happens more often than it seems, especially for strategies with a low win rate. At 1-2% per trade it is unpleasant but survivable. At 10% it nearly wipes out the account.

What follows in practice:

  • Fix risk per trade as a percentage of equity and do not change it in the middle of a losing run.
  • Set a maximum acceptable drawdown in advance, and a threshold at which you stop and review your trades.
  • Do not try to win it back by raising size: that is exactly how a short drawdown becomes a long one. Martingale and unlimited grids work against this arithmetic, more in the article Grid EAs: how they work and where the risk is.
  • Read a backtest through drawdown, not through the profit percentage: How to read an EA backtest.

The psychological part matters just as much: the urge to win back what was lost quickly is what turns a 10% drawdown into a 50% one. That is what my book "The Mind Game" is about: kovalev.trade/book

I will review your system and its risk management: kovalev.trade/trading

#trading #riskmanagement #drawdown #risk #discipline