Losing Streaks and Drawdowns

Streaks are normal

A method that wins 40% or 50% of its trades will have long losing streaks. Not occasionally: almost certainly, and often. Expecting them is the best protection against reacting to them.

The chance of seeing at least one losing streak of a given length somewhere in 100 trades:

Losing streak	Win rate 50%	Win rate 40%
5 in a row	81%	98%
6 in a row	55%	87%
7 in a row	32%	69%
8 in a row	17%	49%

A method with a 40% win rate, like many methods that target 2R, will more often than not see seven losses in a row in 100 trades, and has about an even chance of eight. A trader who expects that can sit through it. A trader who does not will usually change the method, or the size, at exactly the wrong moment.

Bad luck or a broken method?

When a drawdown comes, the question is whether the method has stopped working or whether this is a normal streak. Your journal answers it, not your mood:

• Were the trades taken by the plan? If not, the problem is following the plan, not the method.
• Were the readings right? Losses where the reading was sound but the trade stopped out are normal. Losses where the levels were misread are a skill to work on.
• How does the streak compare with your record? If your journal shows streaks of seven before, and this is a streak of seven, nothing has changed.
• Is the sample big enough? Twenty trades cannot show that a method is broken any more than they can show that it works.

Only change the method after a review, between trades, with your record in front of you.

Rules for getting through

Decide these before you need them (Risk and Money Management, class 4):

• Fixed-percentage risk already shrinks your size as the account shrinks.
• Step down after a drawdown. For example: after a 5% drawdown from your peak, trade at half your normal risk until you have made back half of it.
• Stop after a daily limit. Three losses, or 2% down, and the day is over.
• Pause and review after a larger drawdown, for example 10%: no new trades until you have done a full journal review.

These rules are not punishment. They keep the account intact and give your judgment time to recover.

What not to do in a streak

• Do not double the size to win it back faster.
• Do not move stops further away so that trades stop losing.
• Do not switch methods every few trades. Each new method starts its own streaks, and you never gather enough trades to know whether any of them works.
• Do not stop recording. The journal matters most when you least want to look at it.

Look after yourself

Drawdowns are stressful, and stress makes decisions worse. Sleep, time away from the screen and talking to someone help more than another trade does. If trading is affecting your health, your sleep or the people close to you, stop trading for a while; the market will still be there. And never trade with money you cannot afford to lose.

Exercise

Using your own win rate (or 40% if you do not have one yet), write down the longest losing streak you should expect in 100 trades from the table. Then write the rule you will follow when it comes: what size, when you stop, and when you review. Keep it with your trading plan.