Consider the following table:
| Loss of capital (%) | Gain to recover (%) |
| 5 | 5.3 |
| 10 | 11.1 |
| 15 | 17.6 |
| 20 | 25.0 |
| 25 | 33.3 |
| 30 | 42.9 |
| 35 | 53.8 |
| 40 | 66.7 |
| 45 | 81.8 |
| 50 | 100.0 |
| 55 | 122.0 |
| 60 | 150.0 |
Bear in mind that consecutive runs of losses are not merely possible, but will ultimately occur over time, given enough trades. However, when they do happen, this is the point when it is crucial to have a strong money management plan to keep you in the game.
Notes on How the Turtles Dealt with Drawdowns and Went About Recovering from Losses
Aggressive pyramiding of more and more units had a downside. If no big trend materialized, then those little losses from false break-outs would eat away even faster at the Turtles’ limited capital. How did Eckhardt teach the Turtles to handle losing streaks and protect capital? They cut back their unit sizes dramatically. When markets turned around, this preventive behavior of reducing units increased the likelihood of a quick recovery, getting back to making big money again.
The rules were simple. For every 10 percent in drawdown in their account, Turtles cut their trading unit if they were trading a 2 percent unit and if an 11 percent drawdown happened, they would cut their trading size from 2 percent to 1.6 percent (2.0 x 80%). If their trading capital dropped down 22 percent, then they would cut their trading size by another 20 percent (1.6 x 80%), making each unit 1.28 percent.
When did they increase their unit sizes back to normal? Once their capital started going back up. Erle Keefer remembered one of his peers saying, “Oh my God, I am down so much that I have to make 100 percent just to get back to even.” But that Turtle ended up the year with a nice bonus, because the markets finally started clicking (and trending). Keefer added, “When the statistics finally all work and all those markets start moving, those ‘hot wires’ can start pulling you up pretty fast from a drawdown.”
For example, let’s say you are at $10,000 and you keep losing, then you win a little, then you lose a little. You are now down to $7,500. You are probably trading 40 to 50 percent of your original unit size. All of a sudden everything goes back up to $7,800. It goes up to $8,000, and you start restoring unit size. The Turtles could be down eleven months and one week into the year and then in the last three weeks of the year go from being down 30 or 40 percent to up 150 percent. Look at their month-by-month data from 1984 to 1988 (see Appendix). When the markets kicked in, it was a wild ride.
By reducing positions when they were losing money, the Turtles countered the arithmetic progression toward “ruin” effectively. Dennis and Eckhardt’s logic makes good conceptual sense, even for non-math novice traders.
Eckhardt did not want the Turtles to worry about linear decreases in their accounts. The slightest exponential curve from a big trend would eventually surpass the steepest linear curve they saw while losing. Discipline, money management, and patience were the only ways it would work.
This day-to-day routine, however, was mundane. Every day they would come in and there would be an envelope with their name on it. That envelope would have their printouts with their positions. It included updated “N” values, too. That’s right, the Turtles did not have to worry about the basics of calculating “N.” Of course, they learned the hows and whys of “N” from Eckhardt, but the time-consuming calculations were done for them. The Turtles simply picked up their envelopes and checked to make sure their positions and orders were all as they were supposed to be.
There were two basic “stops” or exits to get Turtles out of their trades:
- The 2N stop.
- The S1 or S2 breakout exits.
Why the Table Matters
The asymmetry in the recovery table is the mathematical argument for keeping drawdowns small. A 10% loss requires only an 11.1% gain to recover. That is nearly symmetric. But the math compounds in the wrong direction as losses grow: a 50% loss requires a 100% gain to recover, and a 60% loss requires 150%. The trader who allows a 60% drawdown must more than double their account to get back to even. Every additional percentage point of loss requires a disproportionately larger recovery gain. This is why the Turtle protocol of cutting unit sizes at each 10% drawdown tier is not optional. It is the mechanical solution to a mathematical problem that gets worse nonlinearly.
The Eckhardt insight about linear versus exponential curves is the complementary piece. During a drawdown, losses accumulate in a linear way: each trade risks a defined percentage of a declining account. The recovery comes from trend following’s characteristic lumpy distribution: the account can go sideways for extended periods and then recover explosively when large trends materialize. Eckhardt knew this and built the unit-size reduction protocol specifically to ensure the Turtles survived the linear loss phase with enough capital intact to participate fully when the exponential recovery arrived.
The Turtle who was “down 30 or 40 percent” going into the last three weeks of the year and ended up 150% for the year experienced exactly this dynamic. The drawdown was real. The recovery was real. The protocol that preserved enough capital to participate in the recovery was what made the outcome possible.
Frequently Asked Questions
Why does it take a 100% gain to recover from a 50% loss?
Because percentage gains and losses are calculated on different bases. A 50% loss on $10,000 leaves $5,000. A 100% gain on $5,000 returns $10,000. The loss is calculated on the larger starting base and the gain on the smaller reduced base. This asymmetry compounds with the size of the loss, which is why preventing large drawdowns through position sizing and unit reduction is more important than maximizing gains during profitable periods.
How did the Turtles reduce unit sizes during drawdowns?
For every 10% drawdown, they reduced their trading unit by 20%. Starting from a 2% unit at full size: an 11% drawdown reduced the unit to 1.6% (2.0 x 80%). A 22% drawdown reduced it to 1.28% (1.6 x 80%). This progressive reduction ensured that continued losses during the drawdown period produced smaller absolute losses, preserving capital for the recovery. Unit sizes were restored as capital returned toward previous highs.
What is the mathematical principle behind reducing units during drawdowns?
It counters the arithmetic progression toward ruin. A fixed-percentage risk applied to a declining account still produces a declining account, but the absolute dollar amount of each loss shrinks proportionally. By additionally reducing the percentage itself during drawdowns, the Turtle protocol ensures that losses during the worst periods are smaller still, preserving more capital for the eventual recovery. The exponential nature of trend following recoveries means that even a significantly reduced account can recover rapidly when large trends materialize.
Trend Following Systems
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