The Trader's Arithmetic · Lesson 4 of 6
The Hole Gets Steeper: Drawdown and Ruin
Losses and gains are not mirror images. The deeper the hole, the more the ladder out costs.
The most consequential asymmetry in finance fits in one table:
| Drawdown | Gain needed to recover |
|---|---|
| −10% | +11% |
| −20% | +25% |
| −33% | +50% |
| −50% | +100% |
| −75% | +300% |
| −90% | +900% |
Recovery cost grows faster than the loss that caused it — gently at first, then viciously. Down 10%, you are one good month from whole. Down 50%, you must double the remains. Down 90%, you need a ten-bagger — with a shrunken account, using judgement already proven capable of losing 90%. This is why deep drawdowns are not big versions of small ones; they are a different, usually terminal, species.
From this asymmetry comes the concept professionals actually manage: risk of ruin — the probability that a strategy, at a given size, eventually hits a depth from which it cannot return. Its levers are exactly three: your edge (expectancy), your risk per trade, and your ruin line. The lever you fully control is size — and risk of ruin responds to it non-linearly. Small per-trade risk keeps ruin odds near zero even through the streaks of lesson three; push size past a threshold and ruin stops being a tail risk and becomes the destination. The difference between 2% and 10% per trade is not "five times riskier". Compounded through an ordinary bad streak, it is the difference between a bruise and a funeral.
Full honesty, as always: our own test account runs 5% per trade — hotter than anything this lesson would counsel — on money sized to be lost. The arithmetic above is exactly why the account is small, why the worst case (several same-theme trades stopping together) was written down before going live, and why our stake recomputes from the shrinking balance so losses slow their own bleeding. Running hot is a choice you may only make on money whose funeral you have already priced.