# Drawdown and Risk of Ruin: The Maths of Staying in the Game

> Why a 50% loss needs a 100% gain to recover, how long losing streaks really get, and how to size trades so a bad run cannot end you.

Source: https://thecryptotools.com/guides/drawdown-and-risk-of-ruin/ · Updated: 2026-07-19 · Reading time: 7 min

Most traders track returns. The number that actually decides whether they are still trading in two years is drawdown — how far the account falls from its peak before it recovers.

## The recovery asymmetry

Losses and gains are not symmetric. Lose 10% and you need 11.1% to get back. Lose 50% and you need 100%. Lose 80% and you need 400% — a five-fold return simply to break even.

- −10% → +11% to recover
- −25% → +33% to recover
- −50% → +100% to recover
- −75% → +300% to recover
- −90% → +900% to recover

> This is why capital preservation beats return chasing. Avoiding one catastrophic drawdown is usually worth more than several good years of extra performance.

→ Calculator: https://thecryptotools.com/tools/max-drawdown-calculator/

## Losing streaks are longer than you think

With a 50% win rate, the chance of eight consecutive losses in any given eight trades is about 1 in 256. That sounds remote — until you take 500 trades a year, at which point a streak of eight or worse is close to certain to appear.

Assume it will happen and check your sizing against it. Risk 2% per trade and eight losses cost about 15% of the account: unpleasant, survivable. Risk 10% per trade and the same streak takes 57% — you now need to double the account just to get back to flat, and you will be doing it while shaken.

## Risk of ruin

Risk of ruin is the probability that your account falls below the point where you can keep trading, given your win rate, your reward-to-risk ratio and your position size. It combines edge and sizing into one number.

The result is often counterintuitive: a strategy with a genuine positive edge can still have a near-100% chance of ruin if it is sized too aggressively. Edge tells you where you end up in the long run; sizing decides whether you survive long enough to get there.

→ Calculator: https://thecryptotools.com/tools/risk-of-ruin-calculator/

## Edge first, then size

Before sizing anything, confirm you have positive expectancy: (win rate × average win) − (loss rate × average loss). If that number is negative, no position size saves you — smaller sizing only slows the bleed.

A 40% win rate is perfectly viable with a 3:1 reward-to-risk ratio (expectancy +0.6R per trade). A 70% win rate is a losing system at 0.3:1. Win rate in isolation is a vanity metric.

→ Calculator: https://thecryptotools.com/tools/trade-expectancy-calculator/

## Practical limits

- Risk 1–2% of the account per trade. Professionals live at the bottom of that range; the traders who blow up live above it.
- Cap total open risk across correlated positions. Five long alt positions are one leveraged bet on Bitcoin, not five independent trades.
- Set a monthly drawdown circuit breaker — for example, stop trading at −10% for the month. It converts an emotional spiral into a hard rule.
- Cut size after a drawdown, not after a winning streak. Trading a smaller account with the same dollar risk quietly raises your percentage risk exactly when you can least afford it.

→ Calculator: https://thecryptotools.com/tools/position-size-calculator/

## Judging a strategy by its drawdown

When comparing systems or backtests, look past total return to maximum drawdown, how long the recovery took, and whether you could realistically have held through it. A backtest showing 300% a year with a 70% drawdown is unusable by a human being — you would have abandoned it at the bottom, which is when its returns were being generated.

## Frequently asked questions

### What is a good maximum drawdown?

For a discretionary retail trader, keeping peak-to-trough below 20% is a reasonable target. Beyond 30% the psychological pressure alone tends to degrade decision quality.

### How is risk of ruin different from maximum drawdown?

Drawdown is a measured historical fact about what already happened. Risk of ruin is a forward-looking probability that your edge and sizing lead to an account you cannot trade from.

### Does a stop-loss eliminate risk of ruin?

It bounds the loss on each trade, which is essential, but ruin comes from accumulated losses across a streak. Sizing, not the stop itself, determines the outcome.

### Should I risk more when I am confident?

Only within a pre-defined range, and only if your confidence has a measurable historical edge behind it. Discretionary size increases are the most common route from a good month to a ruinous one.

## Related calculators

- https://thecryptotools.com/tools/max-drawdown-calculator/
- https://thecryptotools.com/tools/risk-of-ruin-calculator/
- https://thecryptotools.com/tools/trade-expectancy-calculator/
- https://thecryptotools.com/tools/position-size-calculator/