Drawdown math and why survival wins

A 20% loss and a 20% gain do not cancel out. Most people know this vaguely. Very few have looked at the actual curve, and it is the single most persuasive argument for trading small that anyone has ever put on a page.

The asymmetry

To recover a drawdown you need a gain calculated on what is left, not on what you started with. Lose 50% of $10,000 and you have $5,000; getting back to $10,000 from there is a 100% gain.

gain needed = drawdown ÷ (100 − drawdown)

Drawdown	Gain needed to break even
5%	5.3%
10%	11.1%
20%	25.0%
30%	42.9%
50%	100.0%
60%	150.0%

The curve is gentle until about 20% and then it stops being gentle. Between 5% and 10% the penalty is barely worth mentioning. Past 30% it starts to demand a performance you have no evidence you can produce — because if you could reliably make 43%, you would not be 30% down.

What this does to a real account

Take two traders, same $5,000, same strategy, same run of six losses and four wins. The only difference is risk per trade.

• Trader A risks 1%. Six losses cost about 6%. She is down to roughly $4,700 and needs about 6.4% to get level. Her next trade is the same size as her last one, because 1% of $4,700 is still 1%.
• Trader B risks 8%. Six losses cost around 39%. He is at about $3,050 and needs a 64% gain to see $5,000 again. His position sizes have shrunk with the account, so the same strategy now produces smaller wins against a much larger hole.

Both traders had identical analysis and identical luck. One is inconvenienced; the other has a mathematical problem that the strategy cannot solve. Nothing about market skill separates them — only position sizing.

The point where the decision leaves your hands

There is a floor under this, and it is not a friendly one. Retail CFD accounts in the UK are subject to a margin close-out rule: the broker must close positions when account funds fall to 50% of the margin required to keep them open. If you are running large leveraged positions into a drawdown, you do not get to decide when to stop — the rule decides, at the worst possible moment, and it locks the loss in while the position is furthest offside.

Read that as the outer boundary of a bad day, not as risk management. Every useful decision happens long before it fires.

Why professionals sound boring

This curve is why experienced traders talk endlessly about capital preservation and hardly at all about entries. Staying under roughly 10% drawdown keeps recovery in the range of ordinary performance. It is not caution for its own sake, and it is not a personality trait — it is the recognition that the account you still have is the only thing that can generate the next gain.

The practical translation is short: keep risk per trade small enough that ten consecutive losses would annoy you rather than end you. For most people that is 1%, occasionally 2%. Everything else on this site assumes you have made that decision first.