How to Calculate Your True Drawdown Risk (The Math They Don't Teach)

You have a $100,000 account. The drawdown limit is 10% ($10,000). You open a trade with 1% risk ($1,000). You think: "I have 10 bullets. I can lose 10 times."

Wrong.

If you are trading with a firm that uses Relative Drawdown, you might only have 5 bullets. Or 3. Understanding "True Drawdown Risk" is the only way to survive.

The "Distance to Ruin" Formula

Forget the account size. It's a vanity number. The only number that matters is your Breach Level.

Formula: Distance To Ruin = Current Equity - Breach Level

Example 1: Static Drawdown (The 5%ers)

• Account: $100,000
• Breach Level: $90,000 (Fixed)
• Current Equity: $102,000
• Distance to Ruin: $102,000 - $90,000 = $12,000.
• Risk Capacity: You can lose $12,000 before you die.

Example 2: Relative Drawdown (Most Cheap Firms)

• Account: $100,000
• Max Trailing Drawdown: 10% ($10,000)
• You make $5,000 profit. High Water Mark = $105,000.
• New Breach Level: $105,000 - $10,000 = $95,000.
• Current Equity: $102,000 (You gave back $3k of open profit).
• Distance to Ruin: $102,000 - $95,000 = $7,000.

The Horror: You think you have a $100k account with a $10k limit. But mathematically, you only have $7,000 of breathing room left.

The "Floating Loss" Trap

Many traders calculate risk based on Balance (Closed trades). Firms calculate risk based on Equity (Open trades).

If you have 4 open trades, and they are all red:

• Balance: $100,000
• Equity: $96,000
• Daily Limit Breach: $95,000

You are $1,000 away from losing the account. If you open a 5th trade assuming you have "$100k balance", you will blow the account in minutes.

Rule: Always calculate position size based on Equity, not Balance.

How to Calculate Safe Lot Size

Don't guess. Use the formula: Lot Size = (Equity * Risk%) / (Stop Loss Distance * Pip Value)

For Gold (XAUUSD):

• Equity: $100,000
• Risk: 0.5% ($500)
• SL: 20 pips ($2.00 price move)
• $500 / (20 * 10) = 2.5 Lots

If you are lazy, use our Position Size Calculator (Coming Soon).

Summary

1. Know your Breach Level price exactly. Write it on a sticky note.
2. Calculate "Distance to Ruin" every morning.
3. If Distance to Ruin < 2% of account, HALVE your risk.