Risk of ruin, drawdown, and recovery time

A 10% decline requires more than a 10% gain to recover because the next return is applied to a smaller base. The deeper the drawdown, the more difficult the recovery and the more likely the operator is to face a hard account limit first.

Risk-of-ruin analysis asks whether a chosen edge and position size can survive the number and order of losses that are plausible for the system.

Use historical trade outcomes, conservative assumptions, and reshuffled sequences to estimate drawdown and recovery distributions. Do not rely on one lucky historical order. Test what happens when costs rise, expectancy falls, or a cluster of losses arrives early.

After a drawdown, increasing risk to recover faster often increases the chance of a deeper drawdown. A written recovery policy can specify when to resume, what evidence to review, and whether risk returns gradually rather than emotionally.

The objective is not to avoid every losing period. It is to avoid turning a normal losing period into an irreversible account event.