All lessons
Drawdown and loss limits
After a loss, getting back to the old balance takes a bigger percentage gain. Let’s do that calculation slowly.
Measure decline from a prior peak and define conditions for stopping practice.
Drawdown measures a fall from a previous account-equity peak to a later lower value. Include open-position changes when measuring equity drawdown. Balance-only figures can hide a large floating loss, so state exactly which measure you use.
Recovery percentages are asymmetric. After a loss, the same cash amount is a larger percentage of the smaller remaining account. Taking extra risk to recover quickly can deepen the drawdown instead of solving the original problem.
Set session, daily or strategy loss limits in advance as part of a demo plan. Define what counts, including open risk and fees, and what review follows a stop. Limits are decision rules, not a guarantee against gaps or a reason to resume automatically the next day. Investigate execution mistakes and market changes before changing a strategy.
Let’s use numbers · hypothetical example
A peak of USD 1,000 falls to USD 800: drawdown is 20%. Returning to USD 1,000 requires USD 200, which is 25% of USD 800, not 20%.
Keep in mind
Do not increase position size solely to recover prior losses. A recovery target does not improve the next trade's odds.
Your turn
Using a fictional account, write a cash loss limit, a pause rule and three questions to review before another practice session.
A quick check before we move on
What gain recovers a fall from 1,000 to 800?
- 25% of the remaining 800
- 20% of the remaining 800
- Any single winning trade
Check answer
25% of the remaining 800 The needed 200 divided by remaining equity 800 is 0.25, or 25%.
Sources and further reading
Content reviewed: 29 October 2026
Educational material with hypothetical examples. Trading can cause substantial losses. A course, pattern, stop order or past result cannot guarantee a profit or limit every loss. Practise in simulation and check current rules and product terms in your jurisdiction.
