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The essentials
- A 10%, 20% or 50% loss requires an 11.11%, 25% or 100% gain to recover.
- Repeated percentage returns compound; deposits do not count as trading recovery.
- Check the equity definition and observation frequency behind every drawdown figure.
Start with the correct high-water mark
Drawdown measures the decline from an earlier account peak to a later value. With no cash flows, a peak of $10,000 followed by equity of $8,000 is a 20% drawdown: ($10,000 − $8,000) ÷ $10,000. Maximum drawdown is the largest such peak-to-trough decline within the measured period.
The measurement depends on what the record contains. A balance series using only closed trades can conceal losses in open positions. An equity series that includes unrealized profit and loss reveals more of that exposure. Deposits and withdrawals require a stated cash-flow adjustment; they otherwise distort both peaks and declines.
Divide the loss by what remains
To recover, the account must earn the lost dollars from a smaller base. If the loss fraction is d, the required gain is d ÷ (1 − d). The $8,000 account therefore needs $2,000 ÷ $8,000 = 25%, rather than 20%, to regain $10,000.
The hypothetical table assumes no new deposits, withdrawals or further costs. A 50% loss leaves half the capital, so doubling the remainder is necessary. At a complete 100% loss, no finite percentage return on the zero balance can restore the account. The formula describes a hurdle, not the likelihood of clearing it.
| Loss from USD 10,000 | Remaining capital | Gain needed to recover |
|---|---|---|
| 10% | USD 9,000 | USD 1,000 ÷ USD 9,000 ≈ 11.11% |
| 20% | USD 8,000 | USD 2,000 ÷ USD 8,000 = 25% |
| 50% | USD 5,000 | USD 5,000 ÷ USD 5,000 = 100% |
Follow compounded returns through time
A 20% fall followed by a 20% rise turns $10,000 into $9,600: $10,000 × 0.80 × 1.20. Adding the signed percentages gives zero, but multiplying the balance factors reveals the 4% loss. Each return applies to the balance present when that return occurs.
For a fixed list of returns with no cash flows, rearranging their order leaves the final product unchanged. The route still changes interim peaks, drawdowns and possible rule breaches. Withdrawals, varying position sizes or forced liquidation can also change the ending result. A final return alone cannot describe that experience.
See how sizing changes after losses
A hypothetical $500 loss budget is 5% of a $10,000 account but 6.25% of an $8,000 account. Keeping the dollar amount fixed increases the fraction at risk as capital shrinks. Keeping a percentage fixed reduces the next dollar amount, which changes both the speed of decline and potential recovery.
Five losses of exactly 5% of remaining equity leave $10,000 × 0.95^5 = $7,737.81, before costs; five fixed $500 losses leave $7,500. This is a sizing illustration, not a recommended percentage. A stop instruction cannot ensure losses match either path because an execution can occur beyond its trigger price.
Read the account rules and the full series
When assessing a trading or evaluation account, identify whether the loss limit follows a fixed starting balance or a moving peak. Check whether it uses balance or equity, intraday values or daily snapshots, and which time zone defines the day. Those definitions can make the same trades produce different compliance outcomes.
Reconcile the reported peak, trough and recovery dates against statements, including open positions, charges and external cash movements. Record time below the previous peak as well as maximum depth. Adding $2,000 to an $8,000 account restores the displayed $10,000 balance, but that deposit is not a 25% trading gain.
Official sources
An explanation of financial mechanics based on official sources. Hypothetical calculations are not actual trading results or forecasts.
