The asymmetry of recovery
A loss and its recovery are not symmetrical, because the gain has to be earned on a smaller base.
- −10% needs +11% to recover
- −20% needs +25%
- −33% needs +50%
- −50% needs +100%
- −75% needs +300%
- This is the entire argument for small position sizes, stated as arithmetic rather than opinion.
Maximum drawdown versus current drawdown
Current drawdown is how far below the peak you are right now. Maximum drawdown is the worst such gap ever recorded. When you evaluate a strategy — your own or someone else's — maximum drawdown tells you what you would have had to sit through, and whether you would actually have stayed in the seat.
Duration matters as much as depth
A 20% drawdown that recovers in three weeks is an inconvenience. The same 20% taking fourteen months is what makes people abandon a working strategy at the worst possible moment. Track how long you spend underwater, not just how deep it went.
An account peaks at $50,000 and falls to $37,500 — a 25% drawdown requiring a 33% gain to reach a new high. At a realistic 2% monthly return, that is roughly fifteen months of work to get back to level.
Controlling it in advance
- Fixed small risk per trade caps how fast a streak can compound.
- A monthly loss limit — stop trading at −6% for the month — turns a bad run into a bounded event.
- Reducing size after consecutive losses shrinks the damage while confidence rebuilds.
- Avoiding correlated positions prevents one market event from producing several simultaneous losses.