Mythbusting: Recovering a trading account after a losing streak

Is it really many times harder to recover after a losing streak?

Any trader who’s been around a few years will have seen the account recovery table, where a loss of 10% will take 11.11% to recover, 20% will take 25% down to 80% taking 400% to recover. This needs addressing because it’s misleading, for reasons that are not immediately obvious.

Exhibit A

Exhibit B

What the tables are referring to is what percentage of the remaining balance you will need to get back to the original balance. So you need to 4x (400%) your account in loss to get back from losing 80% of the original amount.

However, if you lost it trading with fixed percentage risk, then the loss compounded down the more you lost, just as it will compound up as you win more. So it works out that you typically only need 1 extra trade vs the amount taken in the losing streak if trading fixed percentage risk.

In other words, your losses get smaller as your account gets smaller, and your wins get bigger as it grows. So it’s not 4x the work it took to make the loss, it’s one extra trade. Again, if you use a percentage of current balance risk. If not, and you use percentage of the original balance, that’s when the original table applies and can be read correctly. But most people don’t do that, thus the misunderstanding.

If you fire up Excel and run the calculations for fixed lot size vs fixed risk percentage, with 5 or 10 losses in a row, then reverse it back up, you’ll see this play out in both cases.

Here’s an example I’ve put together for you: Account Recovery Google Docs Spreadsheet

So if you’re a beginner and feeling pressure not to lose and to use these account recovery tables as guides to how much to risk, don’t!

Yes you need to keep risk low to survive in trading and yes it takes work to recover accounts, but if you use fixed percentage of current balance risk then it’s only one extra trade to get back to where you were to fix your losing streak, not 4x the trades required, as implied by the tables.

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