Risk & Money Management
Compounding & Drawdown Recovery Calculator
Project account growth from a per-period return and number of periods, with optional contributions — plus the gain needed to recover any drawdown.
Compounding is growth in which each period's return is earned on the balance including all previous gains, so the account grows geometrically rather than linearly.
Final balance
$20,398.87
- Total contributed
- $10,000.00
- Total growth
- $10,398.87
- Drawdown recovery
- 25%
Worked example
A trader starts with $10,000 and compounds a 2% return per period for 12 periods, with no extra contributions.
- Period 1
- $10,000 × 1.02 = $10,200
- … period 12
- $10,000 × 1.02¹²
- Final balance
- $12,682.42
- Total growth
- $12,682.42 − $10,000 = $2,682.42
12 periods of 2% compounding turns $10,000 into $12,682.42. Separately, recovering a 20% drawdown from any balance needs a 25% gain (20% ÷ (1 − 20%)).
How this is calculated
With no contributions, a balance compounds as final = principal × (1 + r)^periods. Each period earns on the previous period's gains, which is why the curve bends upward.
Recovering a drawdown takes a larger gain than the loss itself, because the loss shrinks your base: recovery = d ÷ (1 − d). A 50% loss needs a 100% gain to return to even.
When to use this calculator
Use this to sanity-check growth expectations. Enter a realistic per-period return and the number of periods, and the projection shows what disciplined compounding actually produces — usually less than intuition suggests over short horizons and more over long ones.
It is equally useful in reverse: when a marketed strategy promises to double an account in a year, back out the per-month return it implies (about 5.9% compounded) and judge whether that is credible for the approach.
The drawdown-recovery output matters whenever you are sizing risk. Because a 50% loss needs a 100% gain to recover, seeing the recovery gain next to the projected growth makes the case for smaller per-trade risk concrete rather than abstract.
Common mistakes
- Assuming a steady average return compounds the same as a volatile one with the same average — volatility drag makes them different.
- Underestimating how much a large drawdown needs to recover: a 50% loss needs a 100% gain, not 50%.
- Projecting a high per-period return over many periods without accounting for the fact that real returns are rarely constant.
Frequently asked questions
- How does compounding work?
- Each period the balance grows by the return rate: final = principal × (1 + r)^periods. Reinvested gains earn their own gains, which is the compounding effect.
- Why does drawdown recovery take more than the loss?
- A loss shrinks the base you grow from. Recovering a drawdown d requires a gain of d ÷ (1 − d): a 50% loss needs a 100% gain to get back to even.
- What return per period should I assume?
- Use a conservative, historically grounded figure for your strategy and period length; overly optimistic rates compound into unrealistic long-run projections.
- Does this account for withdrawals?
- Not directly — enter a negative contribution per period to model regular withdrawals reducing the balance.
- Why do two traders with the same average return end up with different balances?
- Volatility drag: a strategy that alternates +20%/−20% compounds to less than a steady +2% per period despite a similar arithmetic average, because losses need a larger subsequent gain to recover.
- How is drawdown recovery different from the loss percentage?
- Recovery gain = drawdown ÷ (1 − drawdown), which is always larger than the loss itself because recovery is measured against a smaller, post-loss balance.