PRACTICAL GUIDE
Explained concepts, worked cases and practice to test your understanding. Numerical examples are hypothetical; replace assumptions with your instrument specifications.
The essentials
Percentage loss uses starting capital; recovery uses remaining capital. Drawdown describes a decline from a reference peak. Define balance or equity and the treatment of deposits and withdrawals.
Understand the mechanism, not just the definition
A decline uses the earlier base while recovery uses a smaller base. Losing and then gaining the same percentage does not restore balance. Drawdown uses a previous peak and must identify balance versus equity. Deposits and withdrawals distort curves unless separated from performance.
Example and verification
Mathematical example: 1,000 falling to 800 is a 20% loss. Returning requires 200/800, or 25%. A 50% loss requires 100% growth; a total loss has no finite percentage recovery from the remaining balance.
Worked case, step by step
Falling from 1,000 to 800 loses 200, or 20%. Returning requires 200/800 = 25%. A 20% gain from 800 only reaches 960. A 50% decline needs a 100% recovery. This is arithmetic, not recovery probability or a justification for increasing size.
200 / 800 × 100 = 25%| Decline | Required recovery |
|---|---|
| 10% | 11.11% |
| 20% | 25% |
| 50% | 100% |
| 80% | 400% |
What to verify when applying this
Use the calculator educationally and keep a consistent series. Label balance and equity drawdown rather than comparing them interchangeably. History describes a period, not a guaranteed future loss limit.
Practice: verify it in your environment
Learn by observing the process and keeping its data. Complete this practice in demo or using documentation, without sending real orders or adding capital for the exercise. Record differences between the example and your account specifications.
- Identify the prior peak and the different decline/recovery bases.
- Separate deposits and withdrawals before evaluating the period curve.
Test your understanding
Try the question before revealing the answer. Justify the conclusion and its assumptions rather than memorizing a number.
Does an exact 10% gain recover a 10% loss?
Reveal the explained answer
No. From 90, 10/90 is about 11.11% to return to 100, excluding costs and cashflows.
Sources for further learning
Consult original documentation to check units, features and terms. Your account specifications take precedence over examples in this guide.
