Drawdown and losing streaks
Compare two accounts that each lose four trades in a row
Two accounts start the same week with KSh 100,000 each. Both meet the same four losing trades in a row. The first account risks 1 per cent of the balance on every trade. The second risks 5 per cent of the balance on every trade. Same market, same streak, same method.
The first account loses KSh 1,000, then KSh 990, then KSh 980.10, then KSh 970.30. The balance ends near KSh 96,059.70. A reader can check that by working down from 100,000 four times, each time taking 1 per cent of what is left.
The second account loses KSh 5,000, then KSh 4,750, then KSh 4,512.50, then KSh 4,286.88. The balance ends near KSh 81,450.62. The same four losses cost the second account about KSh 14,609 more, purely because each trade risked a larger share. The right case is the first one, and the reason is arithmetic, not courage.
Work out why a streak gets harder to repair as it deepens
A fall is measured from the peak, so the percentage needed to climb back is always larger than the percentage lost. Drop 10 per cent from KSh 100,000 and the balance is KSh 90,000. To return to KSh 100,000 from KSh 90,000, the account must gain KSh 10,000 on a base of KSh 90,000, which is 11.1 per cent.
Drop 50 per cent and the balance is KSh 50,000. The gain needed to reach KSh 100,000 is KSh 50,000 on a base of KSh 50,000, which is 100 per cent. The deeper the drawdown, the more the recovery outruns the fall. This is why the second account in the comparison has a longer road back.
Keep the risk per trade fixed so the fall stays shallow enough to repair. At 2 per cent risk, six losses in a row take KSh 100,000 down to about KSh 88,562. The exact figure depends on rounding, and spreads and commissions make the real fall slightly larger. Brokers set those costs differently, so the figure varies.
Separate a normal streak from a broken method
A run of losses is not evidence on its own. Count the trades first. Six or seven losses in a row will appear to almost anyone who trades often enough, and a coin flipped many times shows the same pattern. The streak is a property of chance, not a signal that the method failed.
Then check the rules. Write down each losing trade and mark whether it followed the plan. If every loss followed the plan, the method is doing what it was tested to do and the streak is a normal cost. If losses came from trades outside the plan, from a moved stop, or from a doubled position, the fault is in the execution.
Only after that check should the method itself be questioned, and only with a written record over many trades rather than a handful. A change made after four losses, with no record, replaces a tested method with an untested one. The record is what tells the two apart.
Six losses in a row at 2 per cent risk
| Step | Amount | Note |
|---|---|---|
| Starting account | KSh 100,000 | the balance before the first trade |
| Risk per trade | 2 per cent | the most the reader accepts losing on one trade |
| Loss 1 | KSh 2,000 | 2 per cent of KSh 100,000 |
| Loss 2 | KSh 1,960 | 2 per cent of the reduced balance, KSh 98,000 |
| Loss 3 | KSh 1,920.80 | 2 per cent of KSh 96,040 |
| Loss 4 | KSh 1,882.38 | 2 per cent of KSh 94,119.20 |
| Loss 5 | KSh 1,844.73 | 2 per cent of KSh 92,236.82 |
| Loss 6 | KSh 1,807.84 | 2 per cent of KSh 90,392.08 |
| Balance after six losses | KSh 88,584.25 | KSh 100,000 minus the six losses added together |
| Drawdown from the peak | 11.42 per cent | the fall from KSh 100,000 to KSh 88,584.25 |
This ignores spreads, commissions and any swap charged for holding a position overnight. Those costs vary between brokers, so the real fall will be slightly larger. The figures here are rounded to the nearest cent.
Doing it once, step by step
Work through the following steps in order, using your own account figures on paper. Each step produces a number you can compare with the next one.
- 01
Write the peak balance
Take the highest value your account has reached and write it down. This is the reference point for every drawdown figure that follows. Do not use the starting deposit if the account has since grown above it.
- 02
Subtract the current balance
Take the peak and subtract the balance you hold now. The result is the drawdown in shillings. If the result is zero or negative, the account is at a new peak and there is no drawdown to measure.
- 03
Divide by the peak
Divide the fall in shillings by the peak balance. Multiply by 100 to express it as a percentage. For example, a fall of KSh 15,000 from a peak of KSh 150,000 gives 0.10, or 10 per cent.
- 04
Count the losing trades in a row
Go through your trade history and count the consecutive losses ending at the most recent one. Write the number beside the drawdown figure. This separates a shallow fall caused by a long streak from a deep fall caused by large positions.
- 05
Mark each loss as planned or unplanned
For every loss in the streak, note whether it followed your written rules. Planned losses point to normal variation. Unplanned losses point to execution, and that is the part to correct first.
- 06
Set the risk per trade and hold it
Choose a fixed share of the balance to risk on each trade and apply it without change through the streak. A common starting point is 1 to 2 per cent, though the right figure depends on the account and the method. Keep the number fixed so the next drawdown is predictable rather than a surprise.
The mistake most people make here
The common mistake is to double the risk after two or three losses, hoping one big win will repair the account. That turns a normal streak into a deep drawdown, because the next loss is twice as heavy. A second mistake is to abandon a tested method after four losses, then re-enter on a trade that was never part of the plan. Instead, keep the risk per trade fixed, write the streak down, and check whether the losses came from the method or from breaking your own rules. If the rules were followed, the streak is just the cost of doing business.Check yourself
An account falls from KSh 150,000 to KSh 135,000. What is the drawdown in shillings and as a percentage?
The fall is KSh 15,000. As a share of the peak: 15,000 divided by 150,000 equals 0.10, so 10 per cent.
With a KSh 50,000 account and 2 per cent risk per trade, what is the loss on the first trade, and what is the balance afterwards?
2 per cent of KSh 50,000 is KSh 1,000. The balance after that loss is KSh 49,000.
EUR/USD is near 1.0850 and one pip on one standard lot is 10 units of the quote currency. Roughly what is one pip worth in shillings on one standard lot, if the shilling rate is 129 to the dollar?
10 dollars multiplied by 129 gives about KSh 1,290 per pip on one standard lot. The exact figure moves with the exchange rate, and the rate your broker uses will differ.
Questions that come up next
How do I work out my drawdown in shillings when the account has been up and down?
Take the highest value the account has ever reached. That is the peak. Subtract the current balance from that peak. The difference is the drawdown in shillings. To turn it into a percentage, divide the difference by the peak and multiply by 100. If the peak was KSh 250,000 and the balance is now KSh 225,000, the fall is KSh 25,000, which is 10 per cent.
Does a losing streak mean my method is broken?
Not by itself. A run of losses can happen even when the method is sound. Chance alone produces streaks. To judge the method, look at a large number of trades, not the last few. Write down each trade and check whether it followed your rules. If the rules were followed, the streak is normal. If the rules were broken, the problem is the execution, not the method.
Why does a 50 per cent drawdown need a 100 per cent gain to recover?
Because the recovery starts from a smaller base. If KSh 100,000 falls to KSh 50,000, you need to gain KSh 50,000 to get back to KSh 100,000. That gain is measured against the KSh 50,000 you have left. KSh 50,000 divided by KSh 50,000 is 1, or 100 per cent. The deeper the fall, the larger the percentage gain needed to repair it.
Should I change my risk per trade after a few losses?
Changing risk after losses usually makes the drawdown worse. If you double the risk after three losses, the next loss takes twice as much from a smaller balance. That deepens the hole. Keep the risk per trade fixed. If you want to change it, do so as a planned decision made before trading, not as a reaction to a losing streak.
What costs are missing from the drawdown figures on this page?
The figures ignore spreads, commissions and any swap charged for holding a position overnight. Those costs vary between brokers. They make the real fall slightly larger than the numbers shown. When you compare brokers, check the spread and commission on the instrument you trade, because those charges affect your drawdown over time.
How do I record a losing streak so I can learn from it?
Write down the date, the instrument, the entry and exit, the risk taken, and whether the trade followed your plan. Do this for every trade, not just the losers. After a streak, read the notes. Look for repeated mistakes, such as moving a stop or entering without a signal. If no mistakes appear, the streak was likely normal variation.
The words used on this page
- drawdown
- The fall from the highest value an account has reached to its current value. It is measured in money or as a percentage of that peak. A drawdown of KSh 20,000 on a KSh 200,000 peak is 10 per cent.
- losing streak
- Several losing trades in a row. It happens to anyone who trades often enough. It does not prove the method is broken.
- peak
- The highest balance an account has ever held. Drawdown is always measured from this point. If the account later falls, the peak stays the same until a new high is reached.
- risk per trade
- The share of the account you are willing to lose on a single trade. It is often set as a percentage, such as 1 or 2 per cent. Keeping it fixed helps control how deep a drawdown can become.
- spread
- The difference between the buying price and the selling price of an instrument. It is a cost you pay on each trade. It varies between brokers and adds to the real drawdown.
What to take away
- Drawdown is the fall from the peak, and the percentage needed to recover is always larger than the percentage lost.
- A losing streak is normal for anyone who trades often enough, and it is not proof that the method failed.
- Keep risk per trade fixed so a streak stays shallow enough to repair.
- Write down each trade and check whether the losses came from the method or from breaking your own rules.