Why losses and gains are not symmetrical
A loss and the gain needed to undo it are measured against different bases. Lose 20% of $100,000 and you have $80,000. A 20% gain on $80,000 is only $16,000, leaving you at $96,000. To get back to $100,000 you need $20,000 on a base of $80,000: a 25% gain.
gain needed = drawdown ÷ (1 − drawdown)
The gap is small for small losses and grows quickly. A 10% drawdown needs 11.1%. A 30% drawdown needs 42.9%. At 50% the account has to double, and at 75% it has to quadruple. That curve is the strongest argument there is for small risk per trade: the first job of position sizing is to keep you on the flat part of it.
How long recovery takes
The percentage is only half the problem. The other half is time, and time depends on how fast your strategy grows the account: the risk per trade multiplied by the expectancy in R.
With the figures loaded above, a strategy that makes +0.3R a trade at 1% risk grows the account by about 0.3% a trade on average. Recovering a 25% drawdown needs 33.3%, which at that rate takes about 97 trades. At 20 trades a month that is close to five months of trading just to get back to the previous high, assuming the edge holds throughout.
This is why recovery is not solved by raising risk. Doubling risk to 2% halves the recovery time only if the edge is real and nothing else goes wrong, and it doubles the size of the next drawdown, which then needs a proportionally bigger recovery of its own.
What to do during a drawdown
- Keep risk as a percentage of current equity. Sizing from the shrinking balance cuts position size automatically as losses mount, which slows the fall. It also slows the climb back a little, a cost worth paying.
- Check whether the edge has changed. A drawdown inside the range your history predicts is normal. One well outside it may mean the market has changed. The expectancy calculator shows the typical drawdown and losing streak in your own results.
- Set the limit before you need it. Decide in advance the drawdown at which you stop and review, and the daily loss at which you stop for the day. Limits chosen during a losing run tend to move.
- Do not double up to get back faster. Raising size after losses is the most common way a recoverable drawdown becomes an unrecoverable one. The risk of ruin calculator shows how quickly the odds change as risk per trade rises.