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Capital preservation math

Tie the chapter together: survival is the precondition for compounding, and capital preservation is mathematically more valuable than chasing returns.

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Options, Risk Math, and Psychology

Risk Math Deep Dive

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Lesson 46 of 75Options, Risk Math, and PsychologyRisk Math Deep Dive

Today's tiny win: make one idea click.

Tie the chapter together: survival is the precondition for compounding, and capital preservation is mathematically more valuable than chasing returns.

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Survival first, edge second, return third

Here's the math that ties everything together. Final wealth = starting wealth x (1 + r1) x (1 + r2) x (1 + r3) x ... x (1 + rn). Returns COMPOUND. They multiply. The moment any single factor goes to zero — that is, you take a single catastrophic loss that wipes the account — the entire product collapses. Game over. You can't compound what you don't have. This is the deepest principle in trading math.

Wick compares Trader X, nine +5% months then -100% ending at $0, with Trader Y, nine +3% months then -10% ending at $588, showing one ruin wipes out every gain.Trader XNine +5%months, then-100%. Ends at$0.Trader YNine +3%months, then-10%. Ends at$588.
Wick saysOne wipeout zeros everything, so steady defense beats a hot streak.

Worked example with the $500 account. Trader X has nine months of solid 5% gains, then one month of -100% (account zeroed). Cumulative: $500 x 1.05^9 x 0 = $0. Trader Y has nine months of slightly weaker 3% gains and one month of -10%. Cumulative: $500 x 1.03^9 x 0.9 = $588. Trader X had the better edge in nine of ten months. Trader Y won the year. Defense beats offense in compounding math.

Wick holds a clipboard of preservation rules: 1% to 2% risk, a daily loss cap, a pause after -5%, and a red X on sizing up to catch up, showing defense first.Preservation rulesRisk 1% to 2% a tradeDaily loss cap 3% to 5%Pause week after -5%Size up to catch up
Wick saysFour simple rules keep a $500 account alive long enough to learn.

Practical preservation rules for a $500 account. One: never risk more than 1-2% per trade ($5-10). Two: cap your total daily loss at 3-5% of the account ($15-25). Three: stop trading for the week after a 5% drawdown, regardless of edge. Four: scale up position size only after the account hits new equity highs, never to 'catch up' from drawdowns. These rules look conservative on the upside and feel ridiculous when you're winning — that's exactly when they're working.

Wick holds a shield labeled 1-2% risk that blocks falling candles marked account wipeout, keeping him still in the game, showing survival comes before returns.Account wipeoutStill in the game1-2%risk
Wick saysYou cannot grow money you no longer have, so protect the account first.

Recap: returns compound multiplicatively. One catastrophic loss zeros the whole product. Survival is the precondition for everything else in this chapter — Kelly, expectancy, Sharpe, drawdown. Defense compounds. You can only stack what you didn't lose.

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1. Trader X has nine months of +5% then one month of -100%. Trader Y has nine months of +3% then one month of -10%. Who ends the year with more money?

2. Which is the BEST summary of capital preservation math?

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