Tools / Drawdown & recovery
Drawdown & recovery
How deep a hole a loss digs, how long the climb back takes, and how leverage changes both.
gain to recover = 1/(1 − d) − 1
- Gain needed to recover
- Time to recover
- Underlying move that causes it
- Move that wipes you out
The asymmetry. Gain required to get back to even, for every size of loss. The curve goes vertical as losses approach 100%.
Why deep drawdowns are so costly
Losses and gains compound on different bases. Losing half your capital means the remaining half has to double. Recovery time at a steady growth rate g is −ln(1 − d) / g, so a 50% drawdown at 15% a year costs almost five years of compounding just to stand still. Leverage scales the drawdown for a given market move, and at leverage L a move of 1/L against you takes everything.
The theory is in the lesson.