Module 2: Protecting your account · Lesson 5 of 8
Drawdown and why recovery is hard
3 min read
A drawdown is the fall in your account from its highest point to a later low, usually shown as a percentage. Recovery is hard because the gain needed to get back to the peak is always bigger than the loss, and the gap grows quickly as losses deepen.
Why the maths is lopsided
After a loss, you are working with a smaller balance. A 50% loss turns $10,000 into $5,000. To get back to $10,000, the $5,000 must double, which is a 100% gain.
The required gain is: loss ÷ (1 − loss), using decimals.
| Drawdown | Gain needed to recover |
|---|---|
| 10% | about 11% |
| 20% | 25% |
| 30% | about 43% |
| 50% | 100% |
| 75% | 300% |
Small drawdowns are relatively easy to recover from. Large ones can take a very long time, if they are ever recovered at all.
Example: A trader's account peaks at $8,000 and falls to $6,000. The drawdown is $2,000 ÷ $8,000 = 25%. To return to $8,000, the trader needs a gain of $2,000 ÷ $6,000, or about 33%.
Maximum drawdown
Maximum drawdown is the largest peak-to-low fall over a period. It is one of the most useful numbers for judging a strategy, because it shows the worst pain you would have had to sit through. A strategy with strong returns but a 60% maximum drawdown is likely to be very hard to stick with in real life.
Keeping drawdowns shallow
- Risk a small, fixed percentage per trade, such as 1%.
- Limit total open risk, especially across related pairs.
- Set a personal "circuit breaker", for example pausing trading for the day after losses of 3% or for the week after 6%. These figures are illustrative; choose your own in advance.
- Review your strategy if drawdown goes beyond what your testing suggested.
Risk: Leveraged trading can produce large drawdowns very quickly. Deep drawdowns also tempt traders into bigger, riskier trades to "win it back", which often makes things worse.
Key takeaways
- Drawdown measures the fall from your account's peak to a later low.
- Recovery needs a larger percentage gain than the loss: a 50% loss needs 100%.
- Maximum drawdown shows the worst decline a strategy has gone through.
- Small risk per trade and pre-set loss limits keep drawdowns manageable.
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Sign up freeEducational content only — not investment advice. Leveraged trading carries a high risk of loss.