Lessons › Risk and money management › Drawdowns and losing streaks
World 5 · Risk and money management · lesson 10 · level 3
Drawdowns and losing streaks
Even a good plan has losing streaks, so plan for them before they happen.
In one line
Even a good plan has losing streaks, so plan for them before they happen.
Explained simply
Think of a mountain hike: even on the way up, the path dips into valleys before it climbs to the next peak. An account grows the same way, and each dip from a peak is called a drawdown. Knowing how deep the valleys can get helps you keep walking calmly.
The lesson
Drawdown is the drop from an account's highest value to its lowest point before a new high. With a 50% win rate, a streak of 5 or more losses happens somewhere in 100 trades about 8 times out of 10, even when nothing is wrong with the method. Your risk per trade decides how deep a streak cuts: 7 losses in a row cost about 6.8% at 1% risk but about 19.2% at 3%. Knowing your likely worst streak helps you size trades so you can live through it calmly.
A worked example
Illustrative example: an account climbs to a peak of 10,800, then falls to 9,720 before making a new high. The drawdown is 1,080 (10,800 minus 9,720), which is 10% of the peak (1,080 divided by 10,800 times 100). Through a streak of 7 losses, risking 1% each time costs about 6.8% (1 minus 0.99 multiplied by itself 7 times), while risking 3% costs about 19.2%.
The same idea at four levels
- Beginner. A drawdown is how far your account falls from its highest point before it makes a new high.
- Foundation. Drawdown % = (peak − low) ÷ peak, so a fall from 10,800 to 9,720 is a 10% drawdown.
- Intermediate. At a 50% win rate, a streak of 5 or more losses shows up somewhere in 100 trades about 81% of the time.
- Advanced. Risk per trade sets the depth: 7 losses in a row cost about 6.8% at 1% risk and about 19.2% at 3% risk.
- Expert. Experts plan for a streak longer than any they have seen, keep the same risk after losses, and judge a method over many trades, not one bad run.
Mistakes to avoid
- Deciding a method is broken after a normal losing streak.
- Raising risk after losses to win the money back faster.
- Measuring drawdown from the starting balance instead of from the highest peak.
Check yourself
What is a drawdown?
The drop from the account's highest value to its lowest point before a new high. It measures the valley below a peak.
Do good trading plans have losing streaks?
Yes, even good plans have them. Streaks are normal with any win rate below 100%.
An account peaks at 10,000 and falls to 9,000. What is the drawdown?
10%. 1,000 divided by 10,000 is 10%.
What should you do after a normal losing streak?
Keep the same risk and follow the plan. Changing course after a normal streak breaks good plans.
At a 50% win rate, how likely is a streak of 5 or more losses somewhere in 100 trades?
About 81%. Streaks are far more common than most people expect.
Goal of this lesson: Measure drawdown and expect losing streaks as a normal part of trading.