A drawdown always needs a bigger percentage gain to recover than the percentage you lost. A 10% loss needs about 11% to get back, a 50% loss needs 100%, and a 90% loss needs 900%. That asymmetry is why risk per trade, not win rate, decides whether most traders survive.
What is a drawdown in trading?
A drawdown is the fall from an account's highest point (its peak equity) to a later low, before a new high is made. It is usually shown as a percentage of the peak.
If your account grows to $12,000 and then falls to $10,200, your drawdown is $1,800, or 15% of the peak. It does not matter that you are still above your starting deposit. The drawdown is measured from the high.
Two related terms:
- Maximum drawdown: the deepest peak-to-trough fall over the whole period.
- Drawdown in R: the same idea measured in units of risk. If you risk a fixed amount per trade (1R), a 6R drawdown means you lost six risk units from the peak.
Measuring in R is useful because it separates the strategy from the position size. A strategy with a 6R maximum drawdown becomes a roughly 6% drawdown at 1% risk and roughly 12% at 2% risk (a bit less in practice, because compounding shrinks each loss as the account falls).
The drawdown recovery table
The maths is simple. If you lose a fraction L of your account, the gain needed to recover is L ÷ (1 − L).
| Drawdown | Gain needed to recover |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
| 90% | 900% |
The right-hand column accelerates. Below about 20%, recovery is only slightly harder than the loss. Beyond 40%, it becomes a different problem entirely.
That is the core lesson: small drawdowns are an inconvenience; large drawdowns change your future.
How risk per trade creates drawdowns
Every strategy has losing streaks. A model with a 43% win rate, like ours, will regularly see several losses in a row. The question is what those streaks do to the account at different risk levels.
Here is a run of 10 consecutive losses, with risk calculated on the current balance each time:
| Risk per trade | Account after 10 losses | Drawdown | Gain needed to recover |
|---|---|---|---|
| 0.5% | 95.1% | 4.9% | 5.1% |
| 1% | 90.4% | 9.6% | 10.6% |
| 2% | 81.7% | 18.3% | 22.4% |
| 5% | 59.9% | 40.1% | 67.0% |
| 10% | 34.9% | 65.1% | 186% |
The same streak, the same strategy, the same trader. At 1% risk it is a bad month. At 10% risk it is close to the end of the account.
Ten losses in a row is not a rare event for a system that wins less than half the time, especially over hundreds of trades. You should size positions on the assumption that your worst streak has not happened yet.
Compounding cuts both ways
Compounding means your risk amount grows as the account grows and shrinks as it falls. On the way up, this accelerates growth. On the way down, it slows the damage, because each loss is a percentage of a smaller balance.
The catch is that recovery is also slower. After a drawdown, you are risking smaller amounts, so each winning trade adds fewer dollars. This is the recovery table in practice.
Some traders respond by raising risk to "win it back faster". That is how a manageable 15% drawdown becomes a 40% one. Our post on why traders fail prop challenges shows how often this pattern ends a challenge.
What our Monte Carlo test shows about risk per trade
A single backtest is one ordering of trades. The same trades in a different order could produce a much deeper drawdown. A Monte Carlo test reshuffles the trade sequence thousands of times to see the range of outcomes.
We ran 20,000 reshuffles of our core gold model's backtest trades (July 2022 – September 2026, M15, spread and slippage included). All figures are hypothetical. The "worst drawdown" is the 1-in-20 bad case, not the absolute worst.
| Risk per trade | Typical growth | 1-in-20 worst drawdown |
|---|---|---|
| 1% | ~2.4× | ~10% |
| 2% | ~5.7× | ~19% |
| 5% | ~56× | ~41% |
| 10% | ~1,227× | ~67% |
The growth column is what attracts people to high risk. The drawdown column is what they live through. At 10% risk, a 1-in-20 run takes two-thirds of the account, which needs roughly 200% just to recover.
Now assume the live edge is only half the backtest edge. That is a sensible stress test, because live trading always adds friction.
| Risk per trade | Typical growth (half edge) | 1-in-20 worst drawdown |
|---|---|---|
| 1% | ~1.6× | ~15% |
| 2% | ~2.6× | ~29% |
| 5% | ~8.4× | ~59% |
| 10% | ~31× | ~86% |
With a weaker edge, 1% risk still gives a survivable result. At 10%, a 1-in-20 outcome is an 86% drawdown, which needs about a 600% gain to recover. The full method is explained in risk per trade and Monte Carlo.
How to choose a risk level you can live with
A practical way to set risk:
- Know your strategy's drawdown in R. Use a long backtest with costs, and assume live results will be worse.
- Decide the largest drawdown you would accept without changing the plan. Be honest. Many people say 30% and abandon the system at 15%.
- Divide. If you expect a bad-case drawdown around 10–15R and can tolerate 15%, your risk is roughly 1% per trade.
- Check external limits. A prop firm's daily and maximum loss rules may force you lower. Read how to pass a prop firm challenge on gold and check your firm's current rules.
- Review after real trades, not after a single good week.
If you need help turning a risk percentage into a lot size, our lot size guide for gold walks through worked examples.
Keeping drawdowns small in practice
- Keep risk fixed as a percentage; do not raise it after losses.
- Set a personal stop for the day or week, and follow it.
- Do not add unplanned trades to "make it back".
- If you add to positions, do it only when the original trade is already protected, for example at breakeven.
- Track drawdown in R as well as in money, so you can tell a strategy problem from a sizing problem.
You can see how drawdowns behave on a real account on our live results page, including the losing stretches.
FAQ
How much gain do you need to recover a 50% drawdown?
You need a 100% gain. Half the account is gone, so the remaining half has to double to get back to the peak. This is why keeping drawdowns small matters more than chasing big wins.
What is a good maximum drawdown for a trading strategy?
There is no single number; it depends on your goals and limits. Many traders aim to keep realistic worst-case drawdowns under about 15–20%, and prop traders often need to stay well below their firm's maximum loss rule.
Does lowering risk per trade reduce drawdown?
Yes. Drawdown in percentage terms scales roughly with risk per trade. Halving your risk roughly halves the percentage drawdown from the same losing streak, at the cost of slower growth.
Why use Monte Carlo instead of one backtest?
One backtest shows one order of trades. Monte Carlo reshuffles them thousands of times to show a range of possible drawdowns. It gives a better idea of what a bad but realistic run could look like.
This article is educational and not financial advice. Trading gold and leveraged products carries a high risk of loss.
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