Lessons › Risk and money management › Rule one: stay in the game
World 5 · Risk and money management · lesson 1 · level 2
Rule one: stay in the game
Lose half your money and you must double what is left just to get back to the start.
In one line
Lose half your money and you must double what is left just to get back to the start.
Explained simply
Imagine you have 10 marbles and lose half, so 5 are left. To get back to 10 you must win 5 more, which doubles what you have. That is why a 50% loss needs a 100% gain to recover.
The lesson
Losses and gains are not symmetrical: after a 10% loss you need about 11.1% to recover, after a 50% loss you need 100%, and after a 90% loss you need 900%. The gain you need is the loss divided by what is left. That is why careful traders focus first on keeping each loss small. Staying in the game gives your skills time to work.
A worked example
Illustrative example: an account of 10,000 loses 50% and falls to 5,000 (10,000 times 0.5). To get back to 10,000 it must gain 5,000, which is 100% of what is left (5,000 divided by 5,000 times 100). A smaller loss of 10% leaves 9,000 (10,000 times 0.9), and winning back 1,000 from there needs a gain of about 11.1% (1,000 divided by 9,000 times 100).
The same idea at four levels
- Beginner. Money lost is harder to win back than it was to lose, so small losses matter most.
- Foundation. After a 50% loss you need a 100% gain just to get back to where you started.
- Intermediate. The gain needed is the loss divided by what is left: 10% needs 11.1%, 30% needs 42.9% and 90% needs 900%.
- Advanced. Losses stack on each other: five 5% losses leave about 7,738 of 10,000, but five 25% losses leave about 2,373, which needs over 300% to recover.
- Expert. Experts cap every loss before they think about gains, because staying in the game keeps future chances open and gives an edge time to show.
Mistakes to avoid
- Thinking a 50% loss needs only a 50% gain to recover.
- Taking one big bet to win it all back after a loss.
- Letting a losing trade run past the planned stop in the hope it comes back.
Check yourself
You lose 50% of your account. What gain gets you back to the start?
100%. Half is left, so you must double it.
Why do careful traders focus first on keeping losses small?
Big losses need much bigger gains to recover. The deeper the hole, the harder the climb out.
After a 10% loss, what gain gets you back to the start?
About 11.1%. You must win back 10 from the 90 that is left.
What does 'stay in the game' mean for a trader?
Keep enough money to keep trading and learning. Survival gives skill time to work.
An account of 10,000 loses 30%. How much is left?
7,000. 30% of 10,000 is 3,000, and 10,000 minus 3,000 is 7,000.
Goal of this lesson: Understand why big losses are so hard to recover from.