Why do some traders perform worse as time goes on, while they can manage well with small capital, even take off directly? The reason is simply that with larger capital, the drawdown also increases, and an unreasonable drawdown may lead to liquidation. This is something everyone can replicate in my position strategy; we need to change our decision-making! Let's look at a set of data.
When the account drops from 1 million to 800,000 (20% loss), it seems that a return of only 25% is needed to recover. However, if it drops to 700,000 (30% loss), the required return immediately jumps to 42.86%. This seemingly linear numerical change will actually produce exponentially increasing difficulty in actual operations. Because:
1. The investor's psychological tolerance decreases geometrically as losses deepen.
2. The available margin decreases, leading to restricted trading strategies.
3. The market volatility's impact on the remaining principal is amplified by leverage.
When the account drawdown approaches 50%, a terrifying 'free fall effect' occurs:
After the principal is halved, the required margin ratio to maintain the same position will double.
The forced liquidation mechanism begins to show chain reaction characteristics.
Investors often fall into the 'gambler's fallacy,' doubling down in an attempt to recover losses.
For example, with contract leverage, an investor with 1 million in capital uses 3x leverage to go long. When the loss reaches 33%, the account net value remains at 670,000, at which point the available margin is only 170,000. If they continue to hold the original position, the market only needs to reverse by 2% to trigger a forced liquidation—this is what Wall Street often refers to as the 'Margin Call black hole.'
There is even evidence that after a 20% drawdown, 85% ultimately lead to liquidation. This is not just a simple probability issue, but an inevitable result of the interplay between human weaknesses and mathematical laws. When losses exceed the psychological threshold, traders will unconsciously:
1. Abandon the established trading system.
2. Amplify the leverage multiple.
3. Frequently chase high-risk targets.
How to control risk?
1. Limit single trade risk to within 2%.
2. Use dynamic profit and loss strategies.
3. Enforce a 'cooling-off period' when drawdown reaches 15%.
4. Always keep 30% of 'survival reserves.'
Remember: the market is always full of opportunities, but your capital has only one life. Those who ultimately stand at the top of the pyramid are often not the best attackers, but the survival experts who understand defense best.
The strategy profits laid out in the team have all retreated, and the consolidation phase is the hardest to endure. Hold on, victory belongs to us! 🚀
