Drawdown and losing streaks
Drawdown as a percentage of the peak
Drawdown is measured from the highest value the account has ever reached, not from the amount you first deposited. If you add money later, the peak moves up. If you withdraw money, the peak stays where it was. The percentage is the fall divided by that peak, then multiplied by one hundred. A fall from A$10,000 to A$8,860 is A$1,140 divided by A$10,000, which is 0.114, or 11.4 per cent.
The same cash loss can be a different percentage at different times. Losing A$1,140 from a A$10,000 peak is 11.4 per cent. Losing A$1,140 from a A$5,000 peak is 22.8 per cent. The cash figure is the same, but the second account has further to travel to get back to its peak. A fall of 22.8 per cent needs a gain of about 29.5 per cent on the remaining balance to recover, because the gain is measured from a smaller base.
A drawdown percentage is not a score. It is a way to compare the size of a fall with the size of the account that produced it. Two accounts can lose the same number of dollars and be in very different positions. The one with the larger peak is less affected. The one with the smaller peak is more affected. This is why risk is usually set as a percentage of the current balance rather than a fixed dollar amount.
Why a run of losses is a normal feature of a real edge
A trading method with a real edge still loses trades. If it wins six times out of ten, it loses four times out of ten. Those losses do not arrive in a neat pattern. They cluster. Six losses in a row can happen inside a method that wins most of its trades over a large number of attempts. The run is not evidence that the method has stopped working. It is evidence that the method is being used.
The length of a losing run depends on the win rate and the number of trades. A method that wins half its trades will produce longer runs than one that wins seven in ten. Over a hundred trades, a run of six or seven losses is unremarkable for a method that wins half the time. The same method can produce a run of ten losses without the underlying edge changing. The order of wins and losses is random even when the overall proportion is stable.
This matters because the mind reads a losing run as a signal. It feels like the method has broken. It feels like the next trade must win. Neither feeling is information about the next trade. The next trade has the same odds as every other trade under the same conditions. The run is behind you. It does not change what is in front of you. The only thing that changes is the size of the account, and therefore the cash value of the next risk.
How risk per trade sets the size of a drawdown
Risk per trade is the amount you are willing to lose if the trade goes against you. It is usually written as a percentage of the account balance. If you risk 2 per cent of a A$5,000 account, the first loss is A$100. The balance becomes A$4,900. The next 2 per cent is calculated on A$4,900, which is A$98. The loss shrinks as the account shrinks. This is why a run of losses at a fixed percentage does not produce a straight-line fall.
A run of four losses at 2 per cent on a A$5,000 account gives losses of A$100, A$98, A$96.04 and A$94.12. The total lost is A$388.16. The balance is A$4,611.84. The drawdown from the A$5,000 peak is A$388.16 divided by A$5,000, which is 7.8 per cent. Six losses at the same rate would take the balance lower again, and the percentage fall would be larger than six times the first loss, because each loss is taken from a smaller base.
The same run at 5 per cent risk per trade would produce a much larger drawdown. The first loss would be A$250, and the fall would compound from there. The method would be identical. The trades would be identical. Only the risk per trade would differ. This is why the risk setting, not the method, decides how deep a normal losing run cuts. A risk small enough to survive a long run is the setting that keeps the plan intact.
Six losses at 2 per cent risk
| Step | Amount | Note |
|---|---|---|
| Starting balance | A$10,000 | The account value before the losing run begins. |
| Risk on each trade | 2 per cent | The amount the reader decides to risk per trade, set in advance. |
| First loss | A$200 | 2 per cent of A$10,000. |
| Second loss | A$196 | 2 per cent of the reduced balance, A$9,800. |
| Third loss | A$192.08 | 2 per cent of A$9,604. |
| Fourth loss | A$188.24 | 2 per cent of A$9,411.92. |
| Fifth loss | A$184.47 | 2 per cent of A$9,223.68. |
| Sixth loss | A$180.78 | 2 per cent of A$9,039.21. |
| Balance after six losses | A$8,858.43 | The starting balance minus the six losses. |
| Drawdown from the peak | A$1,141.57 | A$10,000 minus A$8,858.43. This is 11.4 per cent of the peak. |
Your broker may round position sizes, charge spreads or commission, and quote a slightly different exchange rate for AUD/USD, so your figures will vary.
Doing it once, step by step
Work through these steps once, in order, to see how a losing run changes an account and how to read the result without changing the plan.
- 01
Write down the peak balance
Find the highest balance the account has reached. Include any money you added and exclude any money you withdrew. Write it on paper. This is the number the drawdown is measured against. If you have not traded yet, use the amount you plan to start with.
- 02
Choose a risk per trade before you open the platform
Decide the percentage of the current balance you will risk on each trade. Write it down. A common beginner range is between 0.5 per cent and 2 per cent, but the right figure depends on your plan and your tolerance for a long run of losses. The figure must be small enough that ten losses in a row would not change your decisions.
- 03
Calculate the cash risk for the next trade
Multiply the current balance by the risk percentage. For a A$5,000 balance at 2 per cent, the cash risk is A$100. For a A$4,900 balance at 2 per cent, it is A$98. The cash risk falls as the balance falls. Do this before each trade rather than using a fixed dollar amount.
- 04
Convert the cash risk into position size
On AUD/USD at 0.6640, one standard lot moves about A$15.06 per pip. Divide your cash risk by that figure to get the number of pips you can risk. If you risk A$100, that is about 6.6 pips. If the stop distance on your chart is larger than that, you must trade a smaller position. Your broker may round position sizes and quote a slightly different exchange rate, so your figure will vary.
- 05
Record the result of each trade
After the trade closes, write down the new balance. Do not adjust the risk percentage to win money back faster. The next trade uses the same percentage on the new balance. This keeps the cash risk falling with the account and stops a normal run from becoming a large drawdown.
- 06
Check the drawdown from the peak
Subtract the current balance from the peak balance. Divide the result by the peak balance and multiply by one hundred. That is the drawdown percentage. Compare it with the number of losses in the run. If the drawdown is within the range your plan allows, the run is normal. If it is outside, stop and review the plan before taking another trade.
The mistake most people make here
The common mistake is to treat six losses in a row as proof that the method is broken, and to increase risk to win the money back quickly. That turns a normal drawdown into a much larger one. Instead, decide your risk per trade before you open the platform, keep it small enough that a run of losses does not change your plan, and check the maths rather than the feeling. A losing streak is a known feature of trading with a real edge, not a signal to abandon the process.Check yourself
If you risk 2 per cent of a A$5,000 account and lose four trades in a row, what is the balance and the drawdown?
Losses: A$100, then A$98, then A$96.04, then A$94.12. Total lost A$388.16. Balance A$4,611.84. Drawdown 7.8 per cent.
On AUD/USD at 0.6640, one standard lot moves 10 units of the quote currency per pip. What is that in A$ per pip?
10 units of the quote currency is 10 US dollars. At 0.6640 AUD/USD, that is 10 divided by 0.6640, which is about A$15.06 per pip. The exact figure varies with the rate your broker uses.
Questions that come up next
Does a run of losses mean the method has stopped working?
Not on its own. A method with a real edge still loses a share of its trades, and those losses cluster rather than spreading out evenly. The length of a run depends on the win rate and how many trades you take, so a run of six or seven losses can sit inside a method that wins more often than it loses. Only a large number of trades can show whether the edge is still there. A short run tells you very little.
How do I tell a normal drawdown from a broken method?
Count trades, not feelings. Write down each result as it happens and compare the total after fifty or a hundred trades with what your plan predicted. If the results sit inside the range the plan allowed for, nothing has broken. If they fall well outside it over a large sample, that is worth examining. One bad week is not a sample.
Should I raise my risk per trade to recover a drawdown faster?
Raising risk increases the size of each loss as well as each win. If the losing run continues, the drawdown grows faster than before, and the balance needed to recover grows with it. The risk per trade is best set before you open the platform, at a size a long run of losses cannot force you to change. Changing it mid-run turns a normal fall into a larger one.
Why does a 22.8 per cent fall need a 29.5 per cent gain to recover?
The gain is measured from the smaller balance, not from the old peak. A A$5,000 account that falls to A$3,860 has to earn A$1,140 on a base of A$3,860, which is about 29.5 per cent. The cash needed is the same as the cash lost, but the percentage is larger because the base is smaller. The deeper the fall, the further the climb back.
Does the pip value stay at A$15.06 on AUD/USD?
No. That figure comes from dividing 10 US dollars by the AUD/USD rate of 0.6640, and the rate moves constantly. It also varies with the rate your broker applies and with any commission or spread charged on the trade. Treat it as an estimate for planning, not a fixed number. Recalculate it whenever the rate has moved.
What does a losing run feel like from the inside?
It feels like evidence. The mind reads a cluster of losses as a signal that the method has broken and that the next trade must win. Neither feeling carries information about the next trade, which has the same odds as every other trade under the plan. The maths is the reliable check, and it does not change with the mood.
The words used on this page
- drawdown
- The distance between the highest value your account has reached and its current value. It is usually written as a percentage of that peak. A fall from A$10,000 to A$8,860 is a drawdown of A$1,140, or 11.4 per cent.
- peak
- The highest value the account has ever reached. Money added later raises the peak, and money withdrawn leaves it where it was. Drawdown is always measured from this figure, not from the amount first deposited.
- losing streak
- A run of trades that all lose, one after another. Runs cluster rather than spreading out evenly, so several losses in a row can appear inside a method that wins more often than it loses.
- edge
- A small, repeatable advantage that makes a method profitable over a large number of trades. It does not prevent individual losses. It only shows itself in the total after many attempts.
- risk per trade
- The share of the account set aside to be lost if a single trade goes against you. It is usually written as a percentage of the current balance, so the cash amount falls as the balance falls.
- pip value
- What one pip of movement is worth in your own currency for the position size you hold. On AUD/USD it changes as the exchange rate changes, so it is an estimate rather than a fixed figure.
What to take away
- Drawdown is measured from the highest point the account has reached, and it is written as a percentage of that peak.
- A run of losses is a normal feature of a method with a real edge, and the length of the run depends on the win rate and the number of trades.
- Raising risk to recover a drawdown faster makes the fall larger if the losing run continues.
- Check the maths over a large number of trades rather than the feeling produced by the last few.