Quiet1,
I'm not yet entirely clear on the precise parameters of P2's approach, and I'd prefer not to personalize the issue anyway, so, instead of making predictions about P2 "blowing up," I'll just lay out the theory as I understand it.
There are two ways that I can can think of to explain why a trader who consistently risks in the range of 20% of his or her entire account and who compounds his or her risk by utilizing leverage in excess of 100% would be deemed "virtually certain" to "wash out": There's the mathematical explanation, and the psychological explanation. Note also that, for purposes of this discussion, "washing out," doesn't mean "impoverished" or even "forced to take a real job." Though poverty or account ruination, or worse, are certainly possible, all "washing out" or "blowing up" really means in this context is "rendered incapable of continuing to trade in the same way." The actual real life result could vary substantiallyfrom one individual or washout to another.
The math isn't very difficult to grasp, though might seem unrealistic to some. Put simply, if a trader routinely risks 20% of his or her account, then a bad losing streak would reduce his or her trading capital to a fraction of its original amount. Theoretically, he or she could keep trading until the account fell below whatever maintenance minimum. Routine use of leverage increases the odds that some grouping of losses, or of a smaller number of unexpectedly large losses, would speed up the process. Again in theory, and from a probabilistic perspective, the only way to avoid this eventuality, other than through sheer luck, would be the "pre-emptive washout," of which perhaps the most positive form would be the one in which the trader who has managed to whatever point to avoid the ruinous cascade takes a significant portion of his or her capital permanently out of the action. Though he or she might continue to trade some fraction of his or her total capital "in the old way," the days of huge real returns will have come to an end, even before the impracticalities of trading truly large amounts of capital come into play.
In the real world, of course, not even the most maniacal system trading aficionado continues to trade an account in "exactly the same way" all the way down from, say, $100k to $1k (around 22 consecutive 20% losses). Introducing the psychological factor, however, is a two-edged sword, as a common psychological response on the part of a confident trader who is accustomed to success and has a "gambling" mentality, after the equivalent of a fourth consecutive 20% loss has reduced his or her total account to 40% of its previous capitalization, would be to become even more aggressive. The likelihood of this response increases if it has ever succeeded in the past, and increases all the more if extraneous pressures (a mortgage, a reputation, whatever...) intrude, and increases yet again if the individual's identity is in some way tied up with the particular approach. The availability of even more highly leveraged instruments (options, futures, and options on futures) may also at this point come into play, especially if the trader's losses have continued to mount.
Finally, the introduction of psychological and other "real world" factors also brings up a range of other threats to the stability of a high-risk, high-leverage, swing-for-the-fences methodology over time - even if it's based on a much smaller than 20% expected maximum loss. Mix one hungover, angry, early post-losing streak, and/or otherwise distracted morning, significant leverage, a seeming "sure thing," the habit of "doubling down" (or similar) on a losing position, some outside-the-usual-envelope event, and simple human nature, and you don't even really need to do the math...
