Position size, loss limits and recovery maths — why surviving drawdowns matters more than finding better setups.
Key takeaways
- A 50% drawdown requires a 100% gain to recover; small losses protect compounding.
- Risk should be defined in rupees per trade before entry, never negotiated during it.
- Consistency of size beats accuracy of prediction over any meaningful sample.
The arithmetic of drawdown is the most useful thing a trader can internalise. Lose 10% and you need 11% to get back. Lose 30% and you need 43%. Lose 50% and you need 100%. Recovery is non-linear, which is why capital preservation is not conservatism — it is the mechanism of compounding.
The practical translation is a fixed risk unit. Decide what a single trade may cost you — commonly 0.25% to 1% of the account — convert it into rupees, and let that number determine the position size given your stop distance. The unit is set before the session, not adjusted because a setup 'looks better'.
Add a daily stop. Two or three consecutive losses is a signal about market conditions or your state of mind, and both are best answered by stopping. The daily stop is what prevents a bad session from becoming a bad month.
Finally, measure risk in aggregate. Four correlated positions — long Bank Nifty, long two banks, short a put — is one position with four tickets. Correlation is the risk most traders discover only when everything goes wrong at once.
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