Drawdown: what a normal losing streak actually looks like
Long losing streaks are not evidence that your system is broken. The maths of how often they happen, and how to tell a normal run from a real problem.
A drawdown is the drop from your account’s highest point to its lowest point before it recovers. It is not a sign of failure. It is the price of admission, and the uncomfortable truth is that a perfectly healthy strategy will produce losing streaks far longer than most people expect. If you win forty percent of your trades, a run of six losses in a row will show up regularly, and one of ten is not exotic.
Almost everyone quits during a drawdown that was statistically ordinary. That is what this note is trying to prevent.
The streaks a good system produces
Coin-flipping intuition is badly wrong here. People assume that a strategy winning four trades in ten will politely alternate. It does not. Losses cluster, purely by chance.
Here is roughly how likely a given streak is, for a strategy with a 40 percent win rate:
| Consecutive losses | Rough odds of it happening on any given run |
|---|---|
| 3 in a row | about 1 in 5 |
| 5 in a row | about 1 in 13 |
| 7 in a row | about 1 in 36 |
| 10 in a row | about 1 in 165 |
Now put that in context. If you take three trades a week, you place around 150 trades a year. Across 150 trades, a seven-loss streak is not a possibility, it is close to an expectation. A ten-loss streak over a few years of trading is entirely unremarkable.
None of that means the strategy stopped working. A one to three risk to reward system is supposed to lose most of its trades. That is the deal you signed up for when you chose the ratio, as I set out in the risk to reward ratio.
Why does the money fall faster than the loss count?
Drawdown in percentage terms is harsher than the raw number of losses suggests, because recovery is asymmetric. Losing money and making it back are not mirror images:
| Drawdown | Gain needed to get back to flat |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 33% | 50% |
| 50% | 100% |
| 75% | 300% |
A 50 percent drawdown needs a 100 percent gain to undo. This is the single strongest argument for small position sizes, and it is why the one percent rule exists at all. Risking one percent per trade means a brutal ten-loss streak costs you roughly ten percent, which needs an eleven percent recovery. Risking five percent per trade turns the same streak into a 40 percent hole that needs a 67 percent gain.
Same trades. Same strategy. Same market. Completely different survival odds, decided before any of them were placed. The arithmetic is in position sizing for small accounts.
How do you tell a normal drawdown from a real problem?
This is the genuinely hard part, because “stay the course” is terrible advice if the course is wrong. Some drawdowns are noise and some are signal. A few honest tests:
Are you still following the rules? The most common cause of an unusual drawdown is not the strategy. It is that you stopped trading it. Wider stops, early exits, extra trades taken out of boredom, size increased to make it back faster. If your recent trades would not pass your own checklist, the strategy is not what is being tested.
Is the drawdown outside its historical range? If your testing showed a worst run of eight losses and you are at six, you are inside the envelope. If you are at eighteen, something has changed. This is only answerable if you did the work up front, which is one of the practical arguments for backtesting a strategy properly.
Has the market regime changed? A breakout system will bleed in a choppy, range-bound market and that is not a defect, it is the system meeting conditions it does not suit. The useful question is whether those conditions are temporary or structural.
Is the sample large enough to mean anything? Ten trades tell you almost nothing. A hundred start to say something. People habitually declare a strategy dead on evidence that would not survive a first-year statistics class.
I keep this from becoming a judgement call in the moment by writing the review triggers down in advance, which I cover in when to change your trading strategy.
The plan I make before I need it
Drawdown decisions made during a drawdown are bad decisions. So the rules get written when nothing is going wrong:
- A maximum I will lose in a month before I stop and review rather than trade through it.
- A reduced size level. If the account is down a set amount, I trade smaller until it recovers. Smaller, never larger.
- A hard stop point. A level at which I stop trading real money entirely and go back to testing.
The third one is the one people leave out, and it is the one that matters. Every account that goes to zero passed a point where its owner should have stopped and did not.
Notice that none of these rules involve increasing size to recover faster. Doubling up after losses feels like a shortcut back to the high-water mark and is the most reliable way to never see it again.
What it feels like, honestly
Six weeks into a flat or negative run, the strategy you researched carefully starts to feel obviously stupid. You will find yourself reading about other approaches. Somebody online will be posting screenshots of a fantastic month. The urge to change something becomes very strong, and it always arrives disguised as diligence rather than discomfort.
Having a full-time job helps more than people expect here, because you are not sitting in front of the account all day watching it. The distance is protective. I wrote about that in the psychology of trading around a job.
The other thing that helps is having written down, in advance and in your own handwriting, that a seven-loss streak was always part of the plan. When it arrives, you are reading your own note rather than improvising.
The measurement worth keeping
Track your equity curve peak, your current distance below it, and your longest losing streak to date. Three numbers. They turn a vague feeling that things are going badly into a fact you can compare against what you expected.
Most traders cannot answer “what is your worst historical drawdown?” about their own trading. That is not a small gap. It means every bad run is experienced as unprecedented, because there is nothing to compare it to. The logging habit that fixes it is in why your trading journal beats your next strategy.
Key takeaways
- A drawdown is the drop from your account’s high point to its low point before it recovers. It is the cost of trading, not evidence of a fault.
- At a 40 percent win rate, a seven-loss streak is close to an expectation across a year of trading, not an anomaly.
- Recovery is asymmetric. A 50 percent drawdown needs a 100 percent gain to undo, which is the whole argument for small position sizes.
- Before blaming the strategy, check whether you actually followed it, and whether the drawdown is outside its tested range.
- Write your maximum monthly loss, your reduced-size level, and your hard stop point before you need them, never during.
The full framework, including the monthly review I run against these numbers, is in The 9-to-5 Trader.
Educational only, not financial advice. Trading carries a real risk of loss.
The whole method, in one place
These notes are pieces of the system in The 9-to-5 Trader. Start with the free tools, or read the book.