If your own trading account loses 20%, a 20% gain is not enough to make up the difference. The remaining capital must increase by 25% to reach the original account balance again. After a loss of 50%, the remaining capital even has to double, requiring a performance of 100%. This simple calculation makes clear why capital preservation in trading is much more important than avoiding individual, smaller and above all calculated losses. Drawdown refers to the decline of an account or position from its previous high. It is not only about the loss compared with the starting capital, but always also about the way back to a previous interim high.
Trading drawdown begins at the high
Assume that a trading account rises from 10,000 euros to 12,000 euros and then falls back to 10,800 euros. The loss relative to the high is 1,200 euros, or 10%. Nevertheless, the decline still leaves the account above its starting value. This distinction is important because an account can be profitable overall while still going through a substantial drawdown. The account balance is simply above the original capital but below the previous high.
Maximum drawdown is often important for trading planning. It refers to the largest decline from a high to the subsequent low within a given period. This figure shows the burden a strategy has produced during a difficult phase.
Losses and gains are not symmetrical
A loss always reduces the capital base with which potential profits can later be generated. Less money must therefore produce a higher return simply to restore the original account balance. After a loss of, for example, 30%, only 70% of the original capital remains and would theoretically have to make up the loss. To return to 100%, the remaining 70% must rise by 42.9% to reach the original 100% again.
The problem becomes more severe if position size is increased after a loss. It is then not only a matter of making up a mathematical shortfall. A higher risk is taken at the same time, while the account has already shrunk. A larger loss is therefore not simply a bad month. It substantially changes the starting position of the entire trading account.
| Loss | Gain required to return to the starting value |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 70% | 233.3% |
A losing streak can become large even with small individual risks
A single trade for which only 1% of the total available capital is used sounds like a good plan. Theoretically, the trader has 100 attempts to achieve a gain that can recover previous losses or perhaps even produce a profit with a good risk-to-reward ratio. Mathematically and stochastically, that is quite possible even with an RRR of only 3:1 or 4:1. Nevertheless, several consecutive losses quickly add up and may then affect the trader’s psychology – and that is precisely why trading is so difficult.
With an account of 10,000 euros and a fixed loss of 100 euros per trade, ten complete losses reduce the balance to 9,000 euros. The account is already 10% below its starting value. If the risk is calculated on the current account balance each time, the decline is somewhat smaller:
10,000 euros x 0.99^10 ≈ 9,044 euros
In this case, the drawdown is around 9.6%. However, the original 1% risk does not fully protect the trader: Just ten consecutive losses can strongly influence the assessment of a strategy, position size and behaviour. A losing streak must therefore be taken into account before the first trade. A strategy that produced no more than five consecutive losses in historical data is not automatically prepared for six or ten losses.
Historical results describe the past, but they do not guarantee an upper limit for the next losing phase. A statistic is always informative, yet an outlier can occur within that statistic – and it can affect any trader at any time. Anyone who does not follow the rules or cannot follow them will lose. That is another reason why a trading journal is so important.
The attempt to recover losses quickly
After a loss, immediate pressure to act often arises. The account is supposed to be returned quickly to its previous level, so a risk that was actually calculated and manageable at 50 euros can become 100 euros. After all, doubling the position size also increases the potential gain. After another loss, the position is increased again.
This so-called martingale behaviour changes the entire risk structure. Each new trade is no longer intended merely to implement its own trading idea. It is also supposed to compensate for previous losses, which places a burden on an individual trade that it cannot necessarily fulfil. The market knows neither the previous account balance nor the individual participants. A position does not become more likely to be profitable because the previous trades lost.
The attempt to recover losses therefore often leads to larger positions, poorer entries and a continually growing drawdown. A strategy can be assessed only on the basis of its own expected value.
Drawdown and position size belong together
Position size determines how strongly a series of trades affects the account. A strategy with the same win rate can produce completely different drawdowns at different position sizes:
- Account balance: 10,000 euros
- five losing trades
- risk per trade: 0.5%
With a constant position size, five losses amount to approximately 250 euros. The account is then around 2.5% below its starting value. At 2% risk per trade, the decline increases to approximately 1,000 euros. The trading idea is the same; only the effects on the account are different. Risk per trade must therefore not be considered in isolation. Daily loss, weekly loss and maximum total drawdown also belong in the trading plan.
A strategy can be profitable on paper and still not fit the available capital. If the losing phase cannot be endured psychologically or financially, it will be abandoned before its statistical advantages can possibly be realised.
Maximum drawdown is a stress test
A trading strategy should not be assessed only by its average profit. Its most difficult historical phase must also be included in the review.
Important metrics are:
- largest decline from the account high
- longest losing streak
- average loss
- recovery time until a new high
- number of trades during the losing phase
- change in position size during the decline
Recovery time is often underestimated because an account can mathematically return quickly after a decline if a few strong gains follow. In practice, however, recovery remains dependent on new losses, changing market conditions and lower risk tolerance. A drawdown of 10% can lead to trades being skipped, profits being taken too early or rules being changed spontaneously. The psychological burden then feeds back into the subsequent statistics.
Daily limits do not prevent every loss
A daily loss limit can reduce the damage of a single trading day, but it cannot prevent a long-term drawdown if the loss limit is reached on several consecutive days. At first glance, a daily limit of 2% may seem sensible. However, if it is reached on five consecutive days, around 10% of the account has still been lost. If the limits are not adjusted afterwards, a poor trading phase can continue to burden the account.
A complete plan therefore requires several safeguards:
- maximum risk per trade
- maximum total risk of open positions
- daily loss limit
- weekly or monthly limit
- rule for reducing position size
- rule for returning to evaluation or to a demo account
A strategy must not be assessed only in good phases
Many trading results look convincing when only profitable months are considered. A complete picture emerges only by combining the profitable phase with drawdown. Weak phases must also be examined:
- How does the strategy behave in a sideways phase?
- How large is the decline after several false signals?
- What happens during rapid news-driven moves?
- How many trades are needed to make up a loss?
- Does the strategy remain positive after costs?
A positive expected value does not mean that every month ends positively. It means that the trading idea can have a statistical advantage when repeated often enough. Drawdown shows the price the strategy demands on the way there. If that price is higher than the financial or psychological resilience available, it is not only the position size that does not fit. The entire strategy then does not fit the available capital.
Capital preservation is one of the most important topics in trading because without capital there is no time to exploit a possible statistical advantage over the long term.
Letzte Aktualisierung am 2026-08-21 at 02:05 / Affiliate Links / Bilder von der Amazon Product Advertising API
