Drawdowns, losing streaks and risk of ruin
Losses compound against you asymmetrically, and long losing streaks are normal even for a positive-expectancy method.
The recovery asymmetry
After a drawdown d (as a decimal), the gain needed to recover is d ÷ (1 − d). Down 10% needs +11.1%; down 20% needs +25%; down 50% needs +100%.
Streaks are normal
If each trade independently loses with probability 55%, the chance that a specific run of 10 trades are all losers is 0.55¹⁰ ≈ 0.25%. Over hundreds of trades, some long streak becomes very likely.
Compounding fixed-fraction risk: after n straight losses risking r each, the account is (1 − r)ⁿ of its start. At 1% risk, ten losses leave 0.99¹⁰ ≈ 90.4% (−9.6%). At 5% risk, 0.95¹⁰ ≈ 59.9% (−40.1%).
Risk of ruin is the probability of reaching a loss level you cannot or will not continue from. It rises sharply with risk per trade and falls with expectancy. The exact number depends on assumptions; the direction does not.
Worked example
Same method, different risk (synthetic)
- Trader A risks 1% per trade; Trader B risks 5%. Both hit the same 10-trade losing streak.
- A: 0.99¹⁰ = 0.904 → drawdown 9.6%, needs +10.6% to recover.
- B: 0.95¹⁰ = 0.599 → drawdown 40.1%, needs +67.0% to recover (0.401 ÷ 0.599).
- Identical skill, radically different survival odds.
Risk per trade is the main dial you control for survival.
Common misconceptions
“After five losses in a row, a win is due.”
With independent trades, past losses don't change the next trade's odds (gambler's fallacy).
“I can double my size to win back a drawdown faster.”
Raising risk during a drawdown increases the chance of ruin exactly when your method may be struggling.
Checkpoint