Lose 50% and you need 100% to get back. That is not a rhetorical point — it is arithmetic, and it is the reason position sizing dominates strategy selection.
`` Recovery required = 1 ÷ (1 − drawdown) − 1 ``
Drawdown
Recovery needed
5%
5.3%
10%
11.1%
20%
25.0%
30%
42.9%
40%
66.7%
50%
100%
70%
233%
The curve is gentle until about 20% and then turns sharply. Everything in risk management is an attempt to stay on the flat part.
Why the curve bends
Each loss removes capital that would have generated the next gain. A $10,000 account down 50% has $5,000 working. To return to $10,000, that $5,000 must double — while the system's return is unchanged.
Worse, the trader's position size has halved along with the account, so each winning trade in dollar terms is smaller too. The recovery is slower than the percentage suggests.
Two kinds of drawdown
Normal drawdown is what your system does. A 45% win-rate system will spend most of its life below its high-water mark, and 8–12% dips are ordinary events. These require no action.
Excess drawdown is what happens when something has changed — execution drift, regime shift, or size that grew without being measured. These require diagnosis, in the order covered in the probability lesson: variance, adherence, regime.
Knowing which one you are in is the entire skill, and it requires having calculated your normal range in advance. A trader who has not done that treats every drawdown as excess, and reacts to normal events.
The maximum drawdown you should plan for
Estimate it from your own numbers before you meet it:
For a 45% win-rate system (loss rate 0.55), that gives roughly 8 consecutive losses as a reasonable planning figure over a few hundred trades.
At 1% risk that is 7.7%. Add the losing trades scattered around the streak and a realistic worst-case drawdown is 12–15%.
Write that number down. When you reach 12%, you are meeting a forecast, not a crisis — and that difference determines whether you keep executing.
The recovery trap
The instinct at −20% is to increase size to recover faster. It is exactly backwards.
At −20% on a $10,000 account you have $8,000. Doubling risk from 1% to 2% means:
If the next streak is normal, you are at −35% instead of −27%
The recovery requirement moves from 37% to 54%
Your judgement is already degraded by the drawdown
Increasing size in a drawdown converts a survivable event into a terminal one. The correct response is the opposite: reduce size, or stop and diagnose.
The de-risking ladder
A written rule, decided while calm:
Drawdown
Action
0–8%
Normal. Continue unchanged.
8–12%
Continue, but review adherence in the journal
12–15%
Halve position size. Diagnose properly.
15–20%
Stop trading live. Review 50 trades.
20%+
Stop. The system or the execution has a problem.
Halving size at 12% means the *next* eight losses cost 4% instead of 8%. It buys time to diagnose while the account is still large enough to recover from.
Worked example
Two traders, $10,000, same system, both hit a bad run.
Trader A risks 1% and follows the ladder. Nine losses take them to −8.6%. At 12% they would halve; they never get there. The next 25 trades produce +6R and they recover in five weeks. Maximum pain: 8.6%.
Trader B risks 3%. The same nine losses take them to −23.9%. Recovery requirement: 31%.
At −24% they reason that they need to catch up, and raise risk to 4%. Six more losses — well within normal — takes them to −45%. Recovery requirement is now 82%.
The system's expectancy has not changed. It returns about 30% per hundred trades. Trader B needs nearly three hundred trades just to get back to even, trading in a psychological state that will not permit it.
Same system. Same nine losses. One is at −8.6% and executing normally; the other is functionally finished.
What to take away
Recovery is asymmetric and the curve bends sharply past 20%.
Distinguish normal drawdown from excess. Calculate your normal range first.
Plan for roughly 8 consecutive losses; a realistic worst case is 12–15% at 1% risk.
Never increase size in a drawdown. It converts survivable into terminal.
Write the de-risking ladder before you need it. Halve at 12%, stop at 20%.
Next: the risk that does not show on any single position.
