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Risk & Psychology 1 min read Updated September 2026

Drawdown, Losing Streaks and Risk of Ruin

Drawdown measures the decline from a previous equity peak. Large drawdowns become progressively harder to recover from, which is why risk control matters across losing streaks.

DrawdownRisk ManagementRisk of Ruin
In one lineDrawdown tells you how far the account has fallen from its previous peak.
Equity curve showing drawdown from a peak and the larger gain required to recover.
A 20% loss requires a 25% gain just to return to the starting balance.

Recovery is not symmetrical

Example

$10,000 falls 20% to $8,000.

$8,000 then needs a 25% gain to return to $10,000.

Losing streaks are normal

Even a profitable method can lose several times in a row. The risk on each trade should be small enough that a normal losing streak does not threaten the account.

Related toolDrawdown CalculatorSee recovery mathematics →
Remember this

  • Large losses need even larger percentage gains to recover.
  • Plan for bad sequences, not only average results.
  • Survival protects the ability to learn.
Educational content. This lesson is provided for general educational and informational purposes and is not personal financial or investment advice.
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