The mathematical fact that the percentage gain required to recover from a loss is exponentially higher than the percentage lost. For example, a 50% loss requires a 100% gain just to break even.
How to Do It
Establish an absolute rule to never risk more than 2% of total capital on a single trade.
Effect
Physically prevents the equity curve from falling into an "unrecoverable zone" (e.g., >50% drawdown) even after consecutive losses.
How to Use
1. Define max allowable drawdown (e.g., 20%)
2. Calculate position size using the 1% rule
3. Halve trading size if drawdown reaches 10%