Foundations · Lesson 12 · Beginner
Drawdown math and the 6% rule
You understand why losses are asymmetric and when the 6 percent monthly brake kicks in.
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Losses are asymmetric
A 50 percent loss needs a 100 percent gain just to break even, 90 percent needs 900 percent. An account liquidated to zero never recovers.
The 6% monthly brake
If you lose 6 percent in a month, you stop for the rest of the month. Keep the bulk ultra-safe outside the trading exchange, only a small part as aggressive risk capital.
Tab 1: loss and required recovery. Tab 2: when the 6 percent brake kicks in.
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Test yourself
How much gain do you need to recover from a 50 percent loss?
- 50 percent
- 100 percent
- 200 percent
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The key points at a glance
- A 50 percent loss needs a 100 percent gain to recover, 90 percent needs 900 percent.
- After a 6 percent loss in a month, the month is over.
Deep dive
Why a 90 percent loss needs a 900 percent gain
A loss hits your full capital, the recovery only works on what is left. An account liquidated to zero never recovers. Taleb calls this the absorbing barrier of ruin: the only strategy is to never reach it.
- A 50 percent loss needs a 100 percent gain to break even
- A 90 percent loss already needs a 900 percent gain
- BTC drawdowns: minus 93, 85, 83 and 77 percent since 2011
- Kahneman: losses feel twice as strong as gains
How the 6 percent monthly brake protects you
If you lose 6 percent of your capital in a month, you stop until the end of the month. At 1 percent risk per trade that is around 6 losers in a row. The brake pulls you out of a phase where something is clearly not working.
- Available risk counts realized losses plus open risk
- Paper profits explicitly do not count as a buffer
- After a losing streak: size down, not up
- The comeback trade starts with a tiny size, no revenge trade
Barbell: the bulk safe, a small part aggressive
Taleb's barbell: keep the vast majority ultra-safe outside the trading exchange, only a small ring-fenced part as aggressive risk capital. That way even a total loss on the trading side does not ruin you.
Cryptos love to crash together, practically all altcoins correlate with BTC. Several leveraged positions in a crisis move are not diversification, they are a single big bet.
Sources: Goodman, Taleb, Elder
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