Drawdown and losing streaks
Why a losing streak is built into the arithmetic
A losing streak is not a fault in a method. It is a run of outcomes that the method's own win rate makes possible. If a method wins six trades out of ten, it loses four out of ten. Those four losses do not have to spread out neatly. They can arrive together.
Take ten trades with that same six-in-ten win rate. One possible order is six wins followed by four losses. Another is four losses first, then six wins. Both orders give the same total. The account path is different, but the method is identical.
This matters because a run of losses feels like information about the method. It is usually just the order in which the same outcomes arrived. The order changes the drawdown. It does not change the win rate.
The longer the streak you look for, the more trades you need to see it. A streak of four losses is common in a hundred trades. A streak of six is less common but still expected. Neither is proof that anything has broken.
The cost of raising risk during a drawdown
Suppose an account of ₹50,000 takes four losses at 2 per cent. The balance after each loss is ₹49,000, then ₹48,020, then ₹47,060, then ₹46,119. The risk on the next trade is 2 per cent of ₹46,119, which is ₹922, not ₹1,000.
Now suppose the same account raises risk to 5 per cent after the fourth loss to win the money back. The risk becomes 5 per cent of ₹46,119, which is ₹2,306. A fifth loss takes the balance to ₹43,813. The fall is now much deeper than the fixed-risk path.
The reason is simple. A fixed percentage of a smaller balance is a smaller rupee amount. A raised percentage of a smaller balance is a larger rupee amount. The two move in opposite directions.
The gap widens with every further loss. Fixed risk at 2 per cent loses less each time. Raised risk at 5 per cent loses more each time. The account that raises risk reaches the same drawdown in fewer trades and then keeps falling.
Reading a drawdown without panic
A drawdown is measured from the highest point the account has reached, not from the starting balance. If an account starts at ₹50,000, rises to ₹62,000, then falls to ₹55,800, the drawdown is ₹6,200 from the peak. That is 10 per cent of ₹62,000.
The starting balance is not the peak once the account has grown. A reader who measures from the start will understate the fall. The peak is the reference point, and it moves upward as the account makes new highs.
Time in the drawdown matters as much as its depth. An account that falls 10 per cent and recovers in a week is different from one that stays 10 per cent below its peak for three months. The first is a normal pause. The second tests patience.
Neither depth nor time tells you whether the method has stopped working. Only a change in the method's own rules would tell you that. A drawdown is a measurement, not a verdict.
Six losses in a row at 2 per cent risk
| Step | Amount | Note |
|---|---|---|
| Starting account balance | ₹100,000 | the balance before the losing run begins |
| Risk on each trade | 2 per cent | the share of the account risked per trade |
| Loss on trade 1 | ₹2,000 | 2 per cent of ₹100,000 |
| Balance after trade 1 | ₹98,000 | ₹100,000 minus ₹2,000 |
| Loss on trade 2 | ₹1,960 | 2 per cent of ₹98,000, not of the original balance |
| Balance after trade 2 | ₹96,040 | ₹98,000 minus ₹1,960 |
| Loss on trade 3 | ₹1,921 | 2 per cent of ₹96,040, rounded to the nearest rupee |
| Balance after trade 3 | ₹94,119 | ₹96,040 minus ₹1,921 |
| Loss on trade 4 | ₹1,882 | 2 per cent of ₹94,119, rounded |
| Balance after trade 4 | ₹92,237 | ₹94,119 minus ₹1,882 |
| Loss on trade 5 | ₹1,845 | 2 per cent of ₹92,237, rounded |
| Balance after trade 5 | ₹90,392 | ₹92,237 minus ₹1,845 |
| Loss on trade 6 | ₹1,808 | 2 per cent of ₹90,392, rounded |
| Balance after trade 6 | ₹88,584 | ₹90,392 minus ₹1,808 |
| Total drawdown | ₹11,416, or about 11.4 per cent | ₹100,000 minus ₹88,584 |
Brokers differ in how they round lot sizes, spread and charges, so the exact rupee loss on a trade varies. The percentage figures here assume each loss is exactly 2 per cent of the balance at the time.
Doing it once, step by step
The steps below set up a written record before trading starts, then use it during a losing run. They take the numbers from this lesson and apply them to one account.
- 01
Write the peak balance on a fixed date
Choose the highest balance the account has reached and write it down with the date. If the account has not yet made a new high, use the starting balance. This becomes the reference for every drawdown figure you calculate later.
- 02
Record the risk per trade as a percentage
Write the percentage you will risk on each trade, not a rupee amount. A fixed percentage shrinks the rupee risk as the balance falls. A fixed rupee amount does not, and it grows as a share of a smaller account.
- 03
Note the expected losing streak for your win rate
If your method wins six trades in ten, a run of four losses is expected at some point. Write the number down before you trade. When the run arrives, you compare it with the number rather than reacting to the feeling.
- 04
Calculate the drawdown after each loss
Subtract the current balance from the peak balance. Divide the result by the peak balance to get the percentage. On a peak of ₹62,000 and a balance of ₹55,800, the fall is ₹6,200, or 10 per cent.
- 05
Keep the percentage fixed while the streak runs
Apply the same percentage to the smaller balance on each new trade. The rupee risk falls with the account. This is what stops a normal streak from becoming a deep drawdown.
- 06
Review only the rule, not the result
At the end of the streak, check whether you followed the written risk percentage. A loss that followed the rule is not evidence of a broken method. A loss that broke the rule is the only one that needs a change.
The mistake most people make here
The common mistake is to treat six losses in a row as proof that the method is broken, then increase the risk per trade to win the money back quickly. That makes each later loss larger and deepens the drawdown. A better response is to keep the risk per trade fixed as a percentage of the current balance, as in the example, so losses shrink as the account shrinks. It also helps to write down the expected number of losing streaks before trading, so a normal run does not feel like a failure.Check yourself
An account of ₹50,000 risks 2 per cent on one trade and loses. What is the loss in rupees, and what is the balance afterwards?
2 per cent of ₹50,000 is ₹1,000. The balance afterwards is ₹49,000.
On USD/INR, one pip on one standard lot is ₹10. If the account is ₹50,000 and the risk is 2 per cent, how many pips of loss does that allow on one standard lot?
The risk is ₹1,000. At ₹10 per pip, that is 100 pips.
An account peaks at ₹80,000 and later stands at ₹70,400. What is the drawdown in rupees and as a percentage of the peak?
₹80,000 minus ₹70,400 is ₹9,600. As a share of the peak, ₹9,600 divided by ₹80,000 is 12 per cent.
Questions that come up next
How common is a run of four or six losses in a hundred trades?
A run of four losses is common in a hundred trades when the win rate is six in ten. A run of six is less common but still expected. Neither tells you the method has stopped working. The losses are part of the same arithmetic that produced the wins. Only a change in the win rate over a large number of trades would suggest something has changed.
Why does the same drawdown feel worse after a long winning run?
A drawdown is measured from the highest point the account reached. If the account grew first, that peak is higher than the starting balance. A fall of 10 per cent from a higher peak is a larger rupee amount than 10 per cent from the start. The percentage is the same, but the rupee figure is bigger. That is why the fall feels larger even when the percentage has not changed.
Does a losing streak mean I should stop trading?
A losing streak within the expected range is not a reason to stop. It is a normal part of a method with a win rate below one hundred per cent. Stopping during a normal streak locks in the loss and removes the trades that would have produced the wins. The time to review is when the results differ from what the method's own numbers predict over many trades.
How do I know the difference between a normal streak and a broken method?
You compare the results with the win rate the method is built on. If the method wins six in ten, four losses in a row is inside the range. A broken method shows a lower win rate over a large number of trades, not just a short run. One streak alone cannot tell you which you have. You need the record of many trades to see the pattern.
What should I write down before I start trading?
Write down the win rate the method assumes and the longest losing streak that win rate makes possible. Write down the drawdown that streak would produce at your risk per trade. Then, if the streak arrives, you can check it against the plan instead of reacting to it. The plan turns a normal event into a known one.
Does the drawdown percentage depend on the broker?
The percentage depends on the prices you actually get, which include spread and charges. Brokers differ in how they round lot sizes, set spreads and apply charges. So the exact rupee loss on a trade varies between brokers. The percentage figures in the lesson assume each loss is exactly 2 per cent of the balance at the time.
The words used on this page
- drawdown
- The distance between the highest point an account has reached and its current value. It is measured from the peak, not from the starting balance. It can be written in rupees or as a percentage of the peak.
- losing streak
- A run of losing trades in a row. It is a normal outcome of any method that does not win every trade. The length of the streak depends on the win rate and the number of trades.
- win rate
- The share of trades that make a profit, written as a fraction or a percentage. A win rate of six in ten means six wins and four losses out of every ten trades on average. The order of those wins and losses can vary.
- risk per trade
- The amount of money set to be lost if a trade goes against you. It is often written as a percentage of the current balance. A fixed percentage means the rupee amount shrinks as the balance shrinks.
- peak
- The highest value an account has reached at any point. Drawdown is measured from this point, not from the amount you started with. Once the account grows, the peak moves up.
What to take away
- A losing streak is an order of outcomes, not a fault in the method.
- Drawdown is measured from the peak, so a grown account can fall further in rupees at the same percentage.
- Raising risk during a drawdown makes each later loss larger and deepens the fall.
- Fixed risk as a percentage of the current balance makes losses shrink as the account shrinks.