Drawdown: The Math of Recovery

Drawdown is the peak-to-trough decline of your equity. It is the metric professionals watch, because it measures what actually ends careers.

The asymmetry of recovery

Losses and gains are not symmetric. The deeper the hole, the steeper the climb out:

Drawdown	Gain needed to recover
10%	11%
25%	33%
50%	100%
75%	300%
90%	900%

A 50% drawdown doesn't require "doing a bit better" — it requires doubling the remaining account just to get back to even. This is why risk control (Course 03 so far) is not a chapter of trading; it is trading.

How drawdowns actually happen

Rarely through one catastrophic trade. The usual sequence:

1. Normal losing streak (statistically guaranteed).
2. Sizing creeps up to "win it back" — revenge trading.
3. One oversized loss blows past weeks of risk budget.

Every step is preventable by fixed-fractional sizing — the streak in step 1 is not.

Measuring yourself

On the leaderboard and in your account panel, watch:

• Balance — closed P/L only.
• Equity — includes floating P/L; the honest number.
• Max drawdown — the deepest equity decline; the survival number.

A strategy with lower returns and 8% max drawdown is better capital allocation than a higher-return one with 50% drawdowns — the first can be safely compounded, the second is one bad month from zero.

The compounding connection

Fixed-fractional sizing turns drawdowns into geometry: at 1% risk, even ten straight losses cost ~10%, an 11% recovery. The whole system is engineered so that the worst normal outcome stays on the left side of the table above. Protect the left side, and time does the rest.

By the numbers

The recovery table is unforgiving arithmetic: a 10% drawdown needs an 11% gain to repair, 50% needs 100%, and 90% needs 900%. Markets enforce it at scale — the 2007–09 bear market took the S&P 500 down about 57% peak to trough, and the index did not print a new high until March 2013.