Drawdown and risk limits
Drawdown recovery
The gain required to return an account to its previous peak after a loss. Recovery is not symmetrical: a 10% loss needs an 11.1% gain to undo, and a 50% loss needs 100%.
GFN’s figure
A $100,000 GFN account down to the 2 Step floor of $92,000 would need an 8.7% gain to get back to its starting balance - except that touching the floor has already ended the account.
- Back from a 5% loss
- 5.26% gain
- Back from an 8% loss
- 8.70% gain
- Back from a 10% loss
- 11.11% gain
In detail
Drawdown recovery,explained
The asymmetry is arithmetic, not psychology. Losing a percentage of a smaller base means the recovery is calculated on less capital, so the deeper the hole the steeper the climb out of it. This is the single strongest argument for small position sizes on an account with a fixed floor.
On an evaluation the recovery maths is compounded by the drawdown rule itself: you are climbing back toward a profit target from a lower base while the floor below you has not moved.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
Maximum drawdown
The total loss an account may take before it is failed. Expressed as a percentage of the starting balance, it sets a floor: touch it and the account breaches, whatever the account has made up to that point.
Risk of ruin
The probability that a sequence of trades takes an account to its breach level before it reaches its target, given a win rate, a reward-to-risk ratio and a risk per trade. It is driven mostly by position size.
Peak-to-trough
The decline from an equity curve's highest point to its lowest subsequent point before a new high is made. It is the standard way of stating how deep a strategy's worst historical losing run was.
Equity curve
A chart of account equity over time. Its slope shows the rate of return, its smoothness shows consistency, and its deepest dip is the peak-to-trough drawdown a risk limit would have had to absorb.
Position size
How many lots a trade is placed in. It is calculated from the dollar amount being risked and the stop distance, not chosen first - which is the reverse of how most traders approach it.
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