Drawdown is the drop from your account's highest point to its lowest before a new high. It matters because recovery is asymmetric. A 20% drawdown needs a 25% gain to recover, a 50% drawdown needs 100%, and a 90% drawdown needs 900%. Keeping per-trade risk small, so a normal losing streak causes only a shallow drawdown, is survival, not caution.
What drawdown is
Drawdown measures the decline from a peak in your account equity to the subsequent trough. If you grow $10,000 to $12,000 and then fall to $10,800, your drawdown is $1,200, or 10% from the peak.
Returns tell you where an account ended. Drawdown tells you what you had to endure to get there. Two strategies with the same return but very different drawdowns are not remotely the same trade.
The asymmetric recovery math
Losses and gains are not symmetric. This is the most important list in risk management:
- Lose 10%, and you need +11% to recover.
- Lose 20%, and you need +25%.
- Lose 50%, and you need +100%.
- Lose 90%, and you need +900%.
The deeper the hole, the harder the climb, because you are compounding from a smaller base. Avoiding deep drawdowns matters far more than any single big win.
Risk of ruin
Risk of ruin is the probability that a string of losses wipes out your account before your edge plays out. It rises sharply with the percentage you risk per trade. Risk 10% per trade and a perfectly normal run of losses can be fatal. Risk 1% and the same run is a minor dip.
Even a positive-expectancy strategy can ruin you if you size too large, because you can go broke before the average asserts itself. Small size keeps you at the table long enough for the edge to work.
Losing streaks are normal
With any realistic win rate, long losing streaks are statistically expected, not bad luck. A strategy that wins 45% of the time will, over hundreds of trades, routinely string together 6, 8, even 10 losses in a row.
Size so that your worst plausible streak produces a drawdown you can tolerate financially and emotionally. The losing-streak calculator on this site makes those odds concrete.
Controlling drawdown
You control drawdown mainly through one dial: risk per trade. Cap it at around 1% and your worst streaks stay shallow. Push it to 5% and a normal streak becomes a crisis. Correlated positions count as one risk, so three long dollar trades are not three independent bets.
Some traders add a rule: after a fixed drawdown, say 6% in a period, cut size or stop for a while.
Drawdown and psychology
Deep drawdowns tempt revenge trading, oversizing to win it back, and abandoning a working plan at the worst moment. The financial hole and the psychological hole feed each other.
Shallow drawdowns keep you calm enough to follow the plan. That is the real reason to keep risk small: it protects your decision-making, not just your balance. Log the streak in your journal and keep executing.
Questions
Why is recovering from a drawdown so hard?
You compound back from a smaller base. A 20% loss needs a 25% gain, a 50% loss needs 100%, and a 90% loss needs 900%.
How do I control drawdown?
Mainly by capping risk per trade. Around 1% keeps worst-case streaks shallow. Treat correlated positions as one risk.
Are losing streaks normal?
Yes. At realistic win rates, runs of 6 to 10 consecutive losses happen routinely over hundreds of trades, so position size should assume them.
70–80% of retail investor accounts lose money trading CFDs. This page is education, not advice. All trade examples are constructed composites.
