A 20% decline followed by a 20% gain does not return an account to its starting value. The percentages apply to different balances. Understanding the changing denominator is essential when reviewing a trading record.
A simple account example
Start with a hypothetical $10,000 account. A 20% loss reduces it to $8,000. A subsequent 20% gain adds $1,600, producing $9,600. The account remains $400 below its starting level.
To recover $2,000 from the $8,000 balance requires a 25% gain. The calculation is the amount lost divided by the remaining balance.
The recovery formula
For a loss expressed as a decimal, the gain required to recover is loss ÷ (1 − loss). A 10% loss requires about 11.11%; a 25% loss requires 33.33%; and a 50% loss requires 100%.
These are mathematical relationships with no deposits, withdrawals, fees or taxes. They are not predictions about the likelihood or speed of recovery.
Distinguish drawdown from a single losing trade
For an account review, define drawdown relative to a previous account-equity peak. If the account reaches $12,000 and then falls to $9,000, that is a 25% decline from the peak, even though it remains only 10% below the original $10,000 deposit.
The reference point changes the description. Record it explicitly rather than mixing starting-capital losses with peak-to-trough declines.
Separate cash flows from performance
If someone adds $2,000 to the $8,000 account, the balance returns to $10,000 without an investment recovery. A journal should identify contributions and withdrawals separately from gains and losses.
- Track the equity peak and subsequent trough.
- Record dates alongside the percentages.
- Keep external cash flows in separate columns.
- State whether performance includes trading costs.
SEC educational guidance notes that fees reduce returns, so a real review should use a consistent treatment of expenses. Drawdown arithmetic is a way to describe what happened; it does not establish that taking more risk is an appropriate way to recover.
Source
SEC Investor.gov: Fees and Portfolio Returns. Drawdown examples are illustrative calculations.
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