Why recovering a drawdown is harder than losing
Recovery = Drawdown / (1 β Drawdown). After a loss the capital is smaller, so the same percentage gain brings less money. Lose 20% and you need to make 25% of what is left; lose 50% and you need 100%.
| Drawdown | Gain needed | Example from $10,000 |
|---|---|---|
| 10% | 11.11% | $9,000 β +$1,000 |
| 20% | 25% | $8,000 β +$2,000 |
| 30% | 42.86% | $7,000 β +$3,000 |
| 50% | 100% | $5,000 β +$5,000 |
| 75% | 300% | $2,500 β +$7,500 |
How a losing streak becomes a drawdown
If you risk a share of the current balance, each next loss is slightly smaller: drawdown = 1 β (1 β risk)βΏ, where n is the number of losing trades in a row. If you risk a fixed amount of the starting balance, the drawdown grows linearly: n Γ risk.
| Risk per trade | 10 losses in a row | Gain needed to recover |
|---|---|---|
| 1% | 9.56% | 10.57% |
| 2% | 18.29% | 22.39% |
| 5% | 40.13% | 67.03% |
Long losing streaks happen even to profitable systems: with a 50% win rate the probability of at least one streak of 10 losses within 1,000 trades is about 38%. So the risk per trade is chosen so that the worst expected streak stays well away from the drawdown limit.
Drawdown on a prop account
For prop firms the maximum drawdown is a hard rule: with a 10% limit and 1% risk per trade an account fails after roughly 10β11 losses in a row. A daily loss limit works the same way, only for one day. More in Β«Prop firm risk managementΒ».
How to keep drawdown under control
- fix the risk per trade and size from the stop β the lot size calculator;
- set a daily loss limit and a maximum drawdown after which no new trades open;
- watch drawdown on equity, not just balance: a floating loss is drawdown too.
In Davinchu account analytics measures drawdown on the curve and from hourly equity snapshots including floating losses, and the MT5 risk manager closes new entries when the daily limit or maximum drawdown is reached. How to measure the drawdown itself β peak-to-trough, from balance and on equity β is covered in Β«How to calculate account drawdownΒ».