Position Sizing After a Big Loss

You've just lost 30% of your account. The math says you now need a 43% gain just to get back to breakeven. The psychology says you want to size up to recover faster. The data says that impulse will almost certainly make things worse.

Position sizing during recovery is both a mathematical and psychological challenge. Get it right, and you give yourself the best chance of rebuilding. Get it wrong, and a recoverable drawdown becomes a fatal one.

The Math Problem of Recovery

The relationship between drawdown and required recovery is non-linear, and this is where many traders get into trouble:

This table reveals a critical truth: the deeper the drawdown, the more important it is to protect remaining capital. A 30% drawdown is painful but the recovery math is achievable. A 60% drawdown requires extraordinary performance just to break even.

This is why proper position sizing during recovery isn't optional — it's the difference between a temporary setback and a permanent one.

The Recovery Sizing Paradox

After a loss, traders face a paradox:

Emotional logic: "I'm down 30%. If I size up, I can recover faster. A few good trades at double size and I'm back."

Mathematical reality: Sizing up after a drawdown dramatically increases the probability of further losses, which pushes the recovery math into impossible territory. A few bad trades at double size could take a 30% drawdown to 60% — where you now need 150% returns to recover.

The data is clear: traders who increase size after a drawdown have significantly worse outcomes than those who reduce size.

The Progressive Recovery Model

The most effective approach to position sizing during recovery follows a graduated model:

Phase 1: Stabilization (Weeks 1-2)

Size: 25% of your normal position size

The goal isn't to make money — it's to prove you can follow rules and trade your strategy consistently. At 25% size, even a bad day won't significantly impact your account.

This phase also serves a psychological purpose: it reduces the emotional weight of each trade, allowing you to make clearer decisions.

Phase 2: Rebuilding (Weeks 3-4)

Size: 50% of your normal position size

If you've demonstrated consistent rule-following in Phase 1, increase to half size. The criteria for moving to this phase:

• Zero rule violations in Phase 1
• Positive or breakeven P&L (at reduced size)
• Consistent execution of your strategy

Phase 3: Normalization (Weeks 5-6)

Size: 75% of your normal position size

Almost back to normal, but still with a cushion. This phase builds confidence while maintaining protection.

Phase 4: Full Size

Size: 100% of your pre-drawdown position size

Only return to full size after completing the full recovery period with consistent execution and rule compliance. Even then, "full size" should be calculated on your current account balance, not your peak balance.

Critical Position Sizing Rules During Recovery

Rule 1: Size Based on Current Equity, Not Peak Equity

If your account peaked at $100,000 and you're now at $70,000, your position sizing should be based on $70,000. Sizing as if you still have $100,000 is a form of denial that dramatically increases risk.

Rule 2: Define Maximum Risk Per Trade

During recovery, your maximum risk per trade should be 0.5-1% of current equity. If you normally risk 2%, cut it by at least half.

For a $70,000 account:

• Recovery risk per trade: $350-$700 (0.5-1%)
• Normal risk per trade: $1,400 (2%)

Rule 3: Correlated Position Limits

Don't just control individual trade size — control your total correlated exposure. Being long three different tech stocks is effectively one large position.

During recovery, limit total correlated exposure to 2-3% of equity.

Rule 4: No Averaging Down

During recovery, averaging down on losing positions is strictly prohibited. If a trade hits your stop, take the loss and move on. Averaging down during a recovery phase is how recoverable drawdowns become catastrophic.

Rule 5: The Reset Clause

If at any point during your recovery you violate your sizing rules, reset the clock. Go back to Phase 1. This may feel harsh, but it's necessary — a single oversized trade can undo weeks of careful recovery.

Calculating Your Recovery Position Size

Here's a practical formula:

Recovery Position Size = (Account Equity x Risk%) / (Entry Price - Stop Price)

Example:

• Account equity: $70,000
• Recovery risk per trade: 0.75%
• Dollar risk: $525
• Entry price: $150.00
• Stop price: $147.50
• Risk per share: $2.50
• Position size: 210 shares

Compare this to pre-drawdown sizing:

• Account equity: $100,000
• Normal risk per trade: 1.5%
• Dollar risk: $1,500
• Same trade: 600 shares

The recovery position is 65% smaller. This might feel frustratingly slow, but it's the sizing that gives you the highest probability of successful recovery.

The Psychological Challenge

The hardest part of recovery sizing isn't the math — it's accepting the pace. When you're trading small and watching the market make moves you "could have" captured at full size, the temptation to size up is enormous.

Remind yourself:

• The goal of recovery isn't speed — it's survival and consistency
• Small, consistent gains compound faster than you think
• One oversized loss can erase weeks of careful progress
• Your edge hasn't disappeared; you're just applying it with appropriate risk

Key Takeaways

• The drawdown-recovery math is non-linear — protecting remaining capital is critical
• Sizing up after a loss is the most common and most destructive mistake
• Use a phased approach: 25% → 50% → 75% → 100% over 6+ weeks
• Always size based on current equity, not peak equity
• Maximum per-trade risk during recovery: 0.5-1% of current equity
• If you violate sizing rules, reset the clock
• Patience during recovery isn't just a virtue — it's a mathematical necessity