Recovering from a 20% Drawdown: The Math and Psychology of Coming Back

Table of Contents

• What a 20% Drawdown Really Means 
• Step 1: Pause and Review Before You Trade Again
• Step 2: Fix Risk and Position Sizing After a Loss
• Step 3: Build a Controlled Recovery Plan
• Step 4: Reset Your Mind Before You Reset Your Capital
• Common Recovery Mistakes Nigerian Traders Make
• Turning Drawdowns into Long-Term Trading Skill
• FAQs

What a 20% Drawdown Really Means 

A 20% drawdown simply means your trading capital has dropped by 20% from its highest point. Nothing more, nothing less. It does not mean you are finished or a bad trader. This happens to almost everyone who trades crypto.

If you started with ₦1,000,000 and you are down 20%, you have lost ₦200,000. Your new balance is ₦800,000. 

In cases like this, you don’t need a 20% gain to recover.

To recover that ₦200,000 from ₦800,000, you now need a 25% gain. Why? Because you are growing a smaller base. 20% of ₦1,000,000 is ₦200,000, but 20% of ₦800,000 is only ₦160,000. 

As losses increase, the recovery requirement increases faster. A 30% loss needs about a 43% gain to recover. A 50% loss needs a 100% gain. This is also why traders who rush recovery often dig themselves into deeper holes. 

However, a 20% drawdown is still a manageable zone. You still have enough capital to trade properly, manage risk, and recover in a controlled way. The danger is not the drawdown itself. The danger is what you do after it.

Here is a breakdown of steps to take after a drawdown.

Step 1: Pause and Review Before You Trade Again

After a 20% drawdown, the most important action is often doing nothing, at least for a short while. Trading immediately after a loss is how small drawdowns turn into big ones.

Start with a short break from the charts. This could be one day or a few days. As long as it takes for your emotions to settle. 

Once you are calm, move into review mode.

Practical things to review:

• Your last 10–20 trades
• Entry reason versus actual market structure
• Whether your stop loss was placed before entry
• Whether you moved stop losses after entering
• Whether position sizes followed your plan

Review the trades to find patterns. For example:

• Did most losses come from oversized positions?
• Were losses clustered around high-volatility news?
• Did you enter trades late due to fear of missing out?
• Did you break rules after one or two losses?

Write these observations down. A simple notebook or notes app is enough. This review process is the foundation of effective trade review. Only after you clearly understand why the drawdown happened should you consider placing another trade.

Step 2: Fix Risk and Position Sizing After a Loss

Once the review is done, the next priority is protecting what remains of your capital. Recovery is impossible without capital, and capital disappears fastest when risk is not controlled.

The first adjustment is risk per trade.

If you were risking:

• 2–5% per trade → reduce to 0.5–1%
• Using high leverage → lower it significantly
• Trading multiple positions at once → reduce the number of open trades

This step feels uncomfortable for many traders because smaller risk means smaller wins. But after a drawdown, the goal is to regain stability.

Here is a simple position sizing approach:

• Decide the maximum amount you are willing to lose per trade (for example, ₦8,000 on an ₦800,000 account).
• Measure the distance to your stop loss.
• Calculate position size so that if the stop loss is hit, you only lose that fixed amount.

Key rules to follow:

• Every trade must have a stop loss before entry
• Stop loss should not be moved further away once the trade is open
• Risk must stay the same across trades

Lower risk reduces emotional pressure, and lower emotional pressure leads to better decision-making.

Step 3: Build a Controlled Recovery Plan

A recovery plan is not about trading more. It is about trading less, but better.

At this stage, you should become very selective.

Practical recovery guidelines:

• Trade only your best setups
• Avoid experimental trades
• Reduce the number of trades per day or week
• Focus on higher timeframes if lower timeframes trigger emotion

Do not make the mistake of trying to recover by increasing trade frequency. Making more trades under stress often leads to more mistakes.

Shift your focus from profit to process.

Ask the following questions:

• Did I follow my rules perfectly today?
• Did I respect my stop loss?
• Did I wait for confirmation?

You can also set recovery milestones that are not money-based, such as:

• 10 consecutive trades with no rule-breaking
• One full week of disciplined execution
• A fixed number of trades reviewed properly

This approach rebuilds trust in your system and yourself. Over time, this consistency leads to gradual equity recovery, which is far more sustainable than aggressive comeback attempts.

Step 4: Reset Your Mind Before You Reset Your Capital

By the time a trader reaches a 20% drawdown, the account is not the only thing affected. The mind is often tired, anxious, or impatient. Do not ignore this mental state.

The first step is acknowledging emotional fatigue. Losses create tension, even if you do not feel it immediately.

Simple but effective mental resets include:

• Taking 48–72 hours away from trading screens
• Reducing exposure to social media trading
• Getting proper sleep before trading sessions
• Writing down fears and expectations before entering trades

You also need to separate your identity from your results. A losing streak does not define you as a trader. It defines a phase in your trading journey. 

Accountability can help here. Trading alone makes it easier to justify bad decisions. Having:

• A trusted trading peer
• A small review group
• Or even a personal checklist you must complete before every trade

can significantly reduce emotional mistakes.

Finally, return to trading with a clearer mindset. Your job is not to make money immediately. It is to execute well. Capital recovery follows psychological recovery, not the other way around.

Common  Recovery Mistakes Nigerian Crypto Traders Make

1. Trying to Recover Too Fast: 

Once a trader sees their account down 20%, the pressure to recover becomes intense. This leads to forcing trades that do not meet their original criteria. Instead of waiting for clear setups, traders enter positions simply because the market is moving. This almost always increases losses rather than reducing them.

2. Increasing Position Size or Leverage After a Loss: 

Some traders believe that using larger positions will help them recover faster. This only increases emotional stress and amplifies mistakes. When position size is too large, every price movement becomes very unsettling. Fear causes early exits, and hope (or even greed) causes traders to hold losing trades longer than planned. This often turns a manageable drawdown into a blown account.

3. Removing or Ignoring Stop Losses During Recovery: 

After a few losses, stop losses start to feel like the problem. Traders begin to believe that if they give the trade more room, it will come back. Sometimes it does, but often it does not. When stop losses are ignored, losses are no longer controlled. A single bad trade can wipe out weeks or months of careful progress.

4. Overtrading: 

After a drawdown, traders spend more hours on the chart, taking more trades than usual. Instead of waiting for the best opportunities, traders react to every small move. More screen time does not mean better trading. In many cases, it leads to more emotional decisions and inconsistent execution.

5. Switching Strategies Too Often: 

Some traders abandon their plan after a few losing trades and jump to a new strategy, indicator, or signal group. This creates confusion and prevents them from properly understanding what actually caused the drawdown. No strategy performs well all the time. Constant switching makes it impossible to build confidence or measure real performance.

6. Copying Random Signals or Tips: 

During recovery, some traders look for certainty from others. They join new Telegram groups, follow Twitter calls, or enter trades without fully understanding the logic. This often leads to losses that feel even worse because the trader did not fully own the decision.

7. Failing to Review Trades: 

Some traders avoid looking back because it is uncomfortable. Others only review trades that went wrong and ignore winning trades. Without proper review, the same mistakes repeat. 

Turning Drawdowns into Long-Term Trading Skill

1. See Drawdowns as Feedback, Not Failure:

A drawdown shows how your strategy behaves under pressure and how you react when trades don't go your way. Traders who improve long-term treat losses as feedback to adjust their process, not as proof that they cannot trade.

2. Identify What the Drawdown Exposed:

Every drawdown reveals something specific. It might be poor position sizing, weak stop-loss discipline, emotional entries, or overtrading. When you clearly identify what broke down, you gain a skill that prevents the same mistake in future market cycles.

3. Build Stronger Risk Discipline:

Recovering traders usually come back with tighter risk rules. Lower risk per trade, fixed position sizing, and consistent stop losses are habits often formed during drawdowns. These habits stay with you and protect your account long after the recovery is complete.

4. Improve Emotional Control Under Pressure:

Drawdowns force you to confront fear, impatience, and overconfidence. Learning to trade calmly while your account is down builds emotional resilience. This skill is important because markets will always have losing periods.

5. Strengthen Your Trading Process:

When you document trades, review mistakes, and follow a clear plan during a drawdown, your process improves. Over time, strong processes outperform talent or luck. 

6. Gain Real Trading Confidence:

True confidence does not come from winning streaks. It comes from knowing you can survive losses, adapt, and recover. Traders who have recovered from drawdowns trust their system more because it has been tested.

7. Use the Experience to Trade Smarter, Not Harder:

After a drawdown, successful traders become more selective. They wait for clearer setups and trade with intention. This shift from quantity to quality is a major step in becoming a consistently profitable trader.

Ultimately, a 20% drawdown is recoverable.

What you need is:

• Proper risk adjustment
• Honest trade review
• Controlled position sizing
• Emotional discipline

Rebuild capital. Regain confidence. Trade safely and deliberately.

FAQs

Q1. How can I recover from a large trading loss?

By reducing risk, reviewing past trades, trading fewer high-quality setups, and focusing on execution rather than quick profits.

Q2. Is a 20% drawdown normal in crypto trading?

Yes. Even professional traders experience 10–30% drawdowns during difficult market phases.

Q3. Should I stop trading completely after a drawdown?

A short pause is recommended, but complete withdrawal is not necessary if you have a structured recovery plan.

Q4. What is the biggest mistake after a trading loss?

Revenge trading and increasing position size to recover faster.

Q5. How long does it take to recover from a 20% loss?

There is no fixed time. Traders who focus on discipline often recover faster than those chasing speed.

Q6. Should I change my strategy after losing?

Only if your review shows structural flaws. Do not change strategies based purely on emotion.

Q7. How much should I risk per trade after a loss?

Usually 0.5%–1% of your account until confidence and consistency return.

Q8. Can psychology really affect trading results?

Yes. Emotional decisions account for a large percentage of avoidable losses.

Q9. How do professional traders handle drawdowns?

They reduce risk, trade less, analyse data, and protect capital first.

Q10. What mindset helps most during recovery?

Viewing drawdowns as feedback and learning opportunities, not personal failure.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.