Drawdown Control & Risk of Ruin

A drawdown is the peak-to-trough decline in your account balance. Understanding the compounding math of drawdowns is critical for capital preservation.

The Mathematics of Drawdown Recovery Drawdown recovery is **non-linear**. As your account loses value, the percentage gain required to recover to break-even grows exponentially:

| Drawdown | Capital Left | Gain Required to Recover | |:---:|:---:|:---:| | 10% | 90% | 11% | | 20% | 80% | 25% | | 30% | 70% | 43% | | 50% | 50% | 100% | | 80% | 20% | 400% |

If you suffer a 50% drawdown, you must double your remaining account balance (100% return) just to get back to where you started.

The Risk of Ruin The probability of ruin is the statistical likelihood that a given trading strategy will deplete an account to zero (or to a level where trading is impossible). * **How to Prevent Ruin**: * **Daily Loss Limit**: Set a hard daily cap (e.g. 3%). If reached, the trading terminal is disabled. * **Drawdown Reductions**: If your account drops by 5%, cut your risk per trade in half (e.g. from 1% to 0.5%) until you recover. * **Maximum Trailing Drawdown**: Crucial for prop firm evaluations, where breaching a 10% limit results in immediate account loss.