A drawdown is the fall from your account's peak to its lowest point before a new peak. Every strategy has them. What separates traders who survive from those who don't is how deep they let them get, because losses and recoveries aren't symmetrical.
Losing streaks are normal
Even a good strategy produces long runs of losses by pure chance. This table shows the probability of hitting at least one losing streak of a given length somewhere in 100 trades, calculated for two win rates.
| Losing streak | Chance in 100 trades (50% win rate) | Chance in 100 trades (40% win rate) |
|---|---|---|
| 4 in a row | 97% | 100% |
| 6 in a row | 55% | 87% |
| 8 in a row | 17% | 49% |
| 10 in a row | 4% | 20% |
Why small risk per trade matters
| Risk per trade | After 6 losses in a row | After 10 losses in a row |
|---|---|---|
| 0.5% | −3.0% | −4.9% |
| 1% | −5.9% | −9.6% |
| 2% | −11.4% | −18.3% |
| 5% | −26.5% | −40.1% |
At 1% risk, a ten-trade losing streak costs under 10%: painful but recoverable. At 5%, the same streak costs about 40%, which needs a 67% gain to recover.
Risk of ruin
Risk of ruin is the probability of losing so much that you can't continue, whether that's blowing the account or breaching a prop firm's maximum drawdown. It rises sharply with risk per trade and falls with positive expectancy. The single most effective way to keep it near zero is to risk a small, fixed percentage per trade.
Key takeaways
- Losses and recoveries aren't symmetrical: a 50% loss needs a 100% gain to recover.
- Long losing streaks happen by chance even with a good strategy.
- Small, fixed risk per trade keeps streaks survivable and risk of ruin low.
- Know your historical worst streak and set a drawdown at which you cut size and review.