Optencis
A drawdown is the fall of your capital from its last peak. Its arithmetic is unforgiving and asymmetric: a loss of 20% needs a gain of 25% to recover, a loss of 50% needs 100%, and a loss of 80% needs 400%. Every rule about how much to risk per trade comes from this one fact. Keep drawdowns small and recovery is routine; let them grow and the maths quietly turns against you, long before the account is empty.
Binary options make the question sharper than most products, because each losing trade costs the whole amount invested and the fixed payout caps what a winning trade can give back. The figures below assume a 90% payout, which is in the upper range of what platforms offer on major assets; a lower payout makes every row worse.
The recovery table
| Drawdown | Gain needed to recover | Winning trades needed at 1% risk and 90% payout, roughly |
|---|---|---|
| 5% | 5.3% | 6 |
| 10% | 11.1% | 13 |
| 20% | 25% | 28 |
| 30% | 42.9% | 48 |
| 50% | 100% | About 110 |
| 75% | 300% | About 330 |
The right-hand column counts net winning trades, each adding 0.9% of the current capital. It shows why a 10% drawdown is a bad week and a 50% drawdown is a different life: the second needs ten times the work of the first, with a method that has just proven it can lose half an account.
Where the drawdown comes from: trade size times streak
A drawdown is the product of two things, the size of each trade and the length of the losing streak. You control the first; the market controls the second. As our article on losing streaks shows, a trader with a 60% win rate should expect seven or eight losses in a row at some point in a year. Here is what that streak does at each trade size:
| Risk per trade | Drawdown after 8 losses | Gain needed to recover |
|---|---|---|
| 1% | 7.7% | 8.4% |
| 2% | 15% | 17.6% |
| 5% | 33.7% | 50.8% |
| 10% | 57% | 132% |
At 1% or 2%, a normal streak is a normal setback. At 5%, it is a third of the account. At 10%, a streak that will happen takes more than half, and the account rarely comes back. This is the whole argument for the 1% to 2% range in our money management rules and in the trade size calculator.
Risk of ruin: the probability of losing it all
Risk of ruin is the probability that your capital falls to a level from which you stop, before your edge has time to work. It depends on your edge, your trade size and how far you let the drawdown go. Two facts matter in practice:
- With no edge, ruin is certain. A 50% win rate at a 90% payout loses 5% of the amount invested on average per trade, whatever the size. Smaller trades only make it slower. The first job is an edge above the break-even win rate, measured over 100 trades or more.
- With a small edge, size decides everything. A trader with a 57% win rate at a 90% payout has a positive expectancy, about 8 cents per dollar traded. At 1% per trade, the probability of ever losing half the account is very small. At 10% per trade, the same trader with the same edge has a substantial chance of being halved within a few hundred trades, because the streaks arrive before the edge compounds.
Our article on expectancy explains how to measure that edge from your journal.
Fixed fraction: the rule that shrinks the amount with the account
Risking a fixed percentage of the current capital, rather than a fixed dollar amount, has a useful property: the amount shrinks as the account falls, so a losing streak eats a smaller and smaller slice, and grows as the account rises. With a 1% rule and $1,000, the first loss costs $10, the tenth in a row costs $9.14, and after 20 straight losses, an event that should never happen with a real edge, the account still has $818. Recalculate the amount once a week, not after every trade: daily recalculation invites fiddling, and fiddling is where discipline leaks.
Drawdown limits as circuit breakers
Because recovery gets harder faster than the loss grows, your trading plan should name the drawdown at which you stop and review, well before the maths becomes brutal:
- 5% in a day: session over.
- 10% in a week: a week off and a full reading of the journal.
- 20% from the peak: back to the demo account until 100 trades follow the plan with a win rate above break-even. A 20% drawdown with a working method is rare; it usually means either the method has stopped matching the market or the plan was not followed.
Frequently asked questions
Why does a 50% loss need a 100% gain?
Because the gain is calculated on what remains. $1,000 that falls to $500 has lost 50%; to go from $500 back to $1,000, the $500 must double, a gain of 100%.
What is an acceptable maximum drawdown?
For a method traded at 1% to 2% per trade, 10% to 15% from the peak is a normal worst case over a year. Beyond 20%, stop and review: the recovery maths is still manageable there, and it stops being manageable soon after.
Does a bigger trade size help me recover faster?
Only if the next trades win, which is exactly what you do not know. Raising the size in a drawdown raises the size of the next loss, and the next loss is the one that makes recovery impossible. The way out of a drawdown is the same method, the same size and time.
Binary options and leveraged products are high-risk: you can lose all the money you invest. Read our binary options guide and our risk disclosure before trading.
