Drawdown and losing streaks
The chart comes first. Picture the account balance as a line moving left to right. It rises, then steps down six times in a row. The gap between the highest peak and the lowest point is the drawdown. The line does not have to break. It only has to step down by the same small amount each time.
Why the balance line falls further than the loss percentage suggests
Each loss is taken from the balance that is left, not from the balance at the start. A 2 per cent loss on ₱30,000 removes ₱600, leaving ₱29,400. The next 2 per cent is taken from ₱29,400, so it removes ₱588, not ₱600. The third removes ₱576.
This is why the arithmetic of a losing streak cannot be done by adding percentages. Three losses of 2 per cent do not add up to 6 per cent of the starting balance. They add up to 5.9 per cent, because each percentage is charged on a smaller number.
The same effect works in reverse when an account grows, and it is the reason a fall and a recovery of the same percentage do not cancel out. A fall of 10 per cent needs a rise of about 11.1 per cent to return to the peak. A fall of 20 per cent needs a rise of 25 per cent.
The chart shows this as a line that bends away from the peak. The first step down is the widest in peso terms, and each later step is slightly narrower. The line still falls, but the size of each step shrinks with the balance.
How a run of losses is counted and what the count does not tell you
A losing streak is a count of consecutive trades that closed at a loss. It says nothing about the next trade. Trades do not remember the ones before them, so a run of six losses does not make a seventh loss more likely or less likely.
Runs of losses are common even when the method is sound. If a method wins half its trades, a run of five losses will appear in a long record by chance alone. The run is a feature of the sequence, not a signal that the method has stopped working.
What matters for survival is the size of each loss, not the length of the run. At 2 per cent risk, six losses in a row take ₱50,000 down by about 11.4 per cent. At 4 per cent risk, the same six losses take it down by more than 21 per cent.
The chart makes the difference visible. Two lines can step down the same number of times and end in very different places. The line with the smaller steps sits higher at the end of the run, and it needs a smaller rise to return to its peak.
What the peso figures depend on and what changes between brokers
A pip is the fourth decimal place in EUR/USD, so a move from 1.0850 to 1.0851 is one pip. On one standard lot, one pip is 10 units of the quote currency. When the quote currency is the US dollar, that is USD 10, not USD 0.10.
Converting that to pesos uses the exchange rate at the time. If PHP 1 is worth about USD 0.017, then USD 10 is about ₱588. The peso figure changes as the exchange rate moves, and the rate your broker applies will differ from the rate shown here.
The cost of a trade is not only the pip movement. A broker may charge a spread, a commission, or a swap for positions held overnight. These charges vary between brokers, and some brokers include them in the spread instead of listing them separately.
Because of this, the real fall in an account can be slightly larger than the figures in these examples. The examples use round numbers so the arithmetic is easy to follow. They are not a forecast of what any account will do.
Six losses in a row at 2 per cent risk
| Step | Amount | Note |
|---|---|---|
| Starting balance | ₱50,000 | A round figure chosen for the example. |
| Risk on each trade | 2 per cent | ₱50,000 x 0.02 = ₱1,000 on the first trade. |
| Loss 1 | ₱1,000 | 2 per cent of ₱50,000. Balance falls to ₱49,000. |
| Loss 2 | ₱980 | 2 per cent of ₱49,000. Balance falls to ₱48,020. |
| Loss 3 | ₱960 | 2 per cent of ₱48,020. Balance falls to ₱47,060. |
| Loss 4 | ₱941 | 2 per cent of ₱47,060. Balance falls to ₱46,119. |
| Loss 5 | ₱922 | 2 per cent of ₱46,119. Balance falls to ₱45,197. |
| Loss 6 | ₱904 | 2 per cent of ₱45,197. Balance falls to ₱44,293. |
| Total fall from the peak | ₱5,707 | ₱50,000 minus ₱44,293. That is 11.4 per cent of the peak. |
The six losses are rounded to the nearest peso. A broker may also charge a spread, commission or swap on each trade, so the real fall can be slightly larger. Spreads and commissions vary between brokers.
Doing it once, step by step
Work through these steps once, using the balance line on the chart and the numbers beside it. Each step uses the same ₱50,000 account and the same 2 per cent risk per trade.
- 01
Mark the peak on the balance line
Find the highest point the line reaches before it starts to step down. Write that figure down. Every drawdown figure is measured from this point, not from the starting balance.
- 02
Count the steps down
Count each separate fall from one balance level to the next. Six steps down in a row is a losing streak of six. The count is a description of what happened, not a prediction of what comes next.
- 03
Measure the gap in pesos
Subtract the lowest point from the peak. On a ₱50,000 account that falls to ₱44,300, the gap is ₱5,700. This is the drawdown in pesos.
- 04
Turn the gap into a percentage
Divide the gap by the peak, then multiply by 100. ₱5,700 divided by ₱50,000 is 0.114, which is 11.4 per cent. The percentage lets you compare one account size with another.
- 05
Check the same run at a higher risk
Repeat the calculation with 4 per cent risk per trade instead of 2 per cent. Six losses in a row would take the same ₱50,000 down by more than 21 per cent. The run is the same length; only the step size changed.
- 06
Compare the balance before the next trade
Look at the balance line before placing another trade. If the line is below its peak, the next loss is charged on a smaller balance. Keep the risk per trade the same, or lower it, and let the count of losses stay a count.
The mistake most people make here
The common mistake is to double the risk after two losses to win the money back quickly. That turns a normal run into a deep hole. At 4 per cent risk, six losses in a row would take the same ₱50,000 down by more than 21 per cent, not 11.4 per cent. Keep the risk per trade the same, or lower it, and check the balance line before the next trade. A losing streak is a sequence, not proof that the method is broken.Check yourself
An account starts at ₱30,000. It loses 2 per cent, then 2 per cent of the new balance, then 2 per cent again. What is the balance after three losses, to the nearest peso?
₱30,000 x 0.98 = ₱29,400. ₱29,400 x 0.98 = ₱28,812. ₱28,812 x 0.98 = ₱28,236. The fall is ₱1,764, or 5.9 per cent of the peak.
EUR/USD is around 1.0850 and one pip on one standard lot is 10 units of the quote currency. If the quote currency is the US dollar, what is one pip worth in pesos when PHP 1 is worth about USD 0.017?
One pip is about USD 0.10, which is about ₱5.88. The exact peso figure changes with the exchange rate, and the rate your broker uses will differ.
Questions that come up next
How long does a losing streak usually last?
There is no fixed length. A run of losses is a count of trades that closed below the entry price, and it can be short or long even when the method is sound. If a method wins half its trades, a run of five losses will appear somewhere in a long record by chance alone. The count itself does not tell you when the run will end. What you control is the size of each loss, not the number of them.
Does a losing streak mean the method has stopped working?
Not by itself. Trades do not remember the ones before them, so a seventh loss is no more or less likely after six. A run of losses is a feature of the sequence, not proof that something broke. The balance line in the chart steps down without breaking. Check whether the size of each loss still matches your plan before you change anything.
Why does a 10 per cent fall need more than 10 per cent to recover?
The fall is taken from the peak, but the recovery is taken from the lower balance. A fall of 10 per cent leaves 90 per cent of the peak, and a rise of 10 per cent on that smaller number does not return to the peak. The account needs a rise of about 11.1 per cent to get back. A fall of 20 per cent needs a rise of 25 per cent.
Can I work out a losing streak by adding the percentages?
No. Each loss is charged on the balance that is left, not on the balance at the start. Three losses of 2 per cent do not add up to 6 per cent of the starting balance. They add up to 5.9 per cent, because each percentage is taken from a smaller number. The same effect works in reverse when an account grows.
Does the peso value of one pip stay the same?
No. One pip on one standard lot of EUR/USD is 10 units of the quote currency, which is USD 10 when the quote currency is the US dollar. In pesos that figure moves with the exchange rate, so it changes from day to day. The rate your broker uses will differ from any rate you see elsewhere. Spreads, commissions and swaps also vary between brokers.
What should I check before the next trade after several losses?
Check the balance line first, then the size of the next loss. If the balance has fallen, the same percentage risk now removes fewer pesos, which is the effect that slows the fall. Keep the risk per trade the same or lower it. Doubling the risk to win the money back turns a normal run into a deep hole.
The words used on this page
- Drawdown
- How far an account has fallen from its highest point. If a ₱50,000 account drops to ₱44,300, the drawdown is ₱5,700, or 11.4 per cent. It is measured from the peak, not from the starting deposit.
- Losing streak
- A count of consecutive trades that closed at a loss. It says nothing about the next trade, because trades do not remember the ones before them. A run of losses is common even when the method is sound.
- Pip
- The fourth decimal place in EUR/USD, so a move from 1.0850 to 1.0851 is one pip. On one standard lot, one pip is 10 units of the quote currency. When the quote currency is the US dollar, that is USD 10.
- Standard lot
- A fixed trade size used to work out the value of a pip. One pip on one standard lot of EUR/USD is 10 units of the quote currency. Smaller lot sizes carry a smaller pip value.
- Spread
- The gap between the price at which you can buy and the price at which you can sell. It is a cost on each trade, and it varies between brokers. A commission or swap may be charged as well.
- Balance
- The amount of money in the account at a given moment. Each loss is taken from the balance that is left, not from the balance at the start. This is why a losing streak cannot be worked out by adding percentages.
What to take away
- Drawdown is measured from the peak, and each loss is charged on the balance that is left, so three losses of 2 per cent add up to 5.9 per cent, not 6 per cent.
- A run of losses is a feature of the sequence, not proof that the method is broken, and the next trade is no more or less likely to lose.
- The size of each loss decides how deep the fall goes: at 2 per cent risk, six losses take ₱50,000 down by about 11.4 per cent, while at 4 per cent risk the same six take it down by more than 21 per cent.
- Keep the risk per trade the same or lower it, and check the balance line before the next trade.