Losing money and making it back are not the same size of problem. A 50% loss needs a 100% gain to get you level again, and that asymmetry is the most clarifying idea in risk management.
The asymmetry, in one table
Start with 100 units. Lose half. You now hold 50. To return to 100 you need to double what is left: a 100% gain, not a 50% one. The loss is measured against the bigger number. The recovery is measured against the smaller one.
The formula is short. For a loss of size L, the gain required to get back to the starting balance is L divided by (1 minus L). Lose 20% and you need 0.20 / 0.80, which is 25%.
This is arithmetic, not a forecast. The table below contains no assumption about any market, strategy, or time period. It would be identical for a bond fund, a business, or a savings account. Figures are rounded to one decimal place.
| Loss taken | What 100 becomes | Gain required to get back to 100 |
|---|---|---|
| -10% | 90.00 | +11.1% |
| -20% | 80.00 | +25.0% |
| -30% | 70.00 | +42.9% |
| -40% | 60.00 | +66.7% |
| -50% | 50.00 | +100.0% |
| -60% | 40.00 | +150.0% |
| -70% | 30.00 | +233.3% |
| -80% | 20.00 | +400.0% |
| -90% | 10.00 | +900.0% |
Read down the right-hand column and notice what happens. The required gain does not rise in step with the loss; it accelerates. Doubling the loss from 30% to 60% more than triples the recovery needed, from 42.9% to 150%. Past the halfway mark the curve stops being steep and becomes close to vertical.
Why this makes drawdown the enemy
Drawdown is the peak-to-trough fall in an account’s value: how far it dropped from its highest point before recovering. It is usually quoted as a percentage, and it is the number the recovery math acts on.
The table explains why a strategy’s worst drawdown tells you more about it than its headline return does. Two accounts can post the same annual figure while living in completely different worlds:
- An account that never falls more than 10% needs an 11.1% gain to make a new high. That is an ordinary quarter for many approaches.
- An account that falls 60% needs a 150% gain (two and a half times the surviving capital) to reach the same place. That is not an ordinary anything.
Both are the same account balance on paper the moment they hit their low. Only one has a realistic path back. The deeper the hole, the more the account is relying on an exceptional run rather than a repeatable one, and exceptional runs are precisely what nobody can promise.
Returns tell you what a strategy did in its good stretch. Drawdown tells you what it asks of you in its bad one.
The reasoning behind that priority is set out in full in Why Drawdown, Not Return, Defines a Strategy. This piece is the arithmetic underneath it.
What it means for sizing
Position sizing is the decision about how much capital is exposed on any single trade or strategy. The recovery table turns sizing from a matter of taste into a matter of consequence.
Here is an illustrative example, using round numbers chosen for clarity rather than drawn from any live account. Suppose an allocation risks 2% of the account on each position and hits a run of ten losing trades. The account is down roughly 18%, and needs about 22% to recover. Uncomfortable, but ordinary. Now suppose the same ten losses were taken at 8% each. The account is down roughly 57%, and needs about 130% to recover. The strategy did not change. Only the size did.
Three practical consequences follow from the math:
- Small losses are cheap to undo; large ones are not. Everything below about 20% sits in a zone where recovery is proportionate. Above it, the cost of the mistake compounds against you.
- Doubling size does not double the risk. It roughly doubles the drawdown, but more than doubles the gain required to recover it. Size and consequence are not on the same scale.
- Concentration is the hidden multiplier. Spreading capital across strategies that do not lose at the same time keeps combined drawdowns shallower than any single one. How much to place behind each is covered in Copy-Trading Allocation: How Much to Put Behind Each Strategy.
What it means for choosing a strategy
When you evaluate a track record, the recovery math gives you a specific question to ask of it: what did this account need to do to get back to its previous high, and how long did that take?
A verified track record on a third-party tracker such as Myfxbook will show maximum drawdown alongside return. Put the drawdown figure into the formula before you read anything else. If a record shows a 45% peak-to-trough fall, it needed roughly an 82% gain to recover, and you should be able to see that recovery in the equity curve, dated, rather than take it on trust. If the recovery is not visible, the account has not made one yet.
Two habits follow. First, treat the worst drawdown in a record as a floor, not a ceiling: it is the worst that has happened so far, not the worst that can. Second, be sceptical of any presentation that features the return prominently and the drawdown in small print, or omits it entirely. A record that will not show you its worst period is not showing you the thing that matters most. How to Read a Myfxbook Track Record walks through where those figures sit and how to check them yourself.
The practical takeaway: protect the base
Compounding works on the capital you still have. Every percentage point of drawdown is a percentage point that has to be earned twice: once to get back, once to get ahead. The second earning is the only one that builds anything.
The lesson is not that losses are avoidable. They are not; every strategy has losing periods, and any approach that appears not to is either very young or not being shown honestly. The lesson is that the size of a loss is the variable that decides how much of your future return is spent on repair work.
- Required gain to recover a loss of L is L / (1 – L). Memorise the shape, not the decimals.
- -10% needs +11.1%. -50% needs +100%. -90% needs +900%. The cost of a loss is not linear.
- Position size controls drawdown; drawdown controls the recovery required. Size is where the decision actually gets made.
- Read maximum drawdown before headline return, and look for a dated, verified recovery in the equity curve.
This article is education, not financial advice, and nothing here is a recommendation to buy, sell, or allocate to anything. The recovery percentages in the table are pure arithmetic and hold in every case; the sizing scenarios elsewhere in the piece are illustrative examples using round numbers, not results from any account. Trading carries risk, including the risk of losing some or all of the capital you commit. Past performance is not a guarantee of future results.
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