The Drawdown Math Every Trader Should Know Before Sizing a Position

Losses and Gains Are Not Symmetrical

If your account falls 50 percent, you do not need a 50 percent gain to get back. You need 100 percent, because you are now working from a smaller base. This asymmetry is simple arithmetic and it explains why large drawdowns are so damaging.

The gain required to recover a loss is: loss ÷ (1 − loss).

• 10 percent drawdown requires about an 11.1 percent gain.
• 20 percent drawdown requires 25 percent.
• 30 percent drawdown requires about 42.9 percent.
• 50 percent drawdown requires 100 percent.
• 75 percent drawdown requires 300 percent.

The curve steepens quickly. Small drawdowns are routine and recoverable. Deep ones may take years, or never be recovered, because the trader is under pressure to take bigger risks to catch up, which tends to deepen the hole.

Losing Streaks Are Normal

Even a strategy with a positive edge produces losing streaks. A system that wins 50 percent of the time will, over a few hundred trades, very likely include a run of seven or eight losses in a row. If each loss costs 5 percent of your account, eight in a row takes roughly a third of it. If each costs 1 percent, the same streak takes under 8 percent.

This is why risk per trade is the most important number in a trading plan. It determines whether a normal bad run is an inconvenience or the end of the account.

Choosing a Size

1. Pick the drawdown you can tolerate, financially and psychologically. Many traders find that anything beyond 15 to 20 percent leads to decisions they later regret.
2. Assume a long losing streak, say ten trades in a row, even if your history shows fewer.
3. Divide. If ten consecutive losses should cost no more than about 10 percent of the account, risk about 1 percent per trade or less.

Futures Specifics

Futures contracts have large fixed sizes. One ES contract moves $50 per index point, so a 10-point stop is $500 per contract. If that exceeds your risk budget, the answer is a smaller contract such as MES, at $5 per point, not a wider tolerance for loss. Size follows the stop distance and risk budget, never the other way around.

Track It

Measure your results in R and watch your running drawdown in R terms. DepthLevel's Trade Journal shows your results in R and your streaks from your actual history, so you can see whether your size is matched to the way your strategy really behaves.