How Losing Streaks impact Trading Accounts
Many traders fail because they look only at their win rate and fail to account for the certainty of losing streaks. In a series of 100 trades, even a strategy with a 60% win rate is statistically almost guaranteed to experience 5 to 7 consecutive losing trades.
The Mathematical Odds of losing streaks
The probability of losing multiple trades in a row is determined by multiplying the loss probability of your strategy:
Streak Probability = (1 - Win Rate)^Streak Length
How Drawdown compounds
When you lose trades, drawdown does not accumulate linearly if you adjust your sizing to your new account balance. For example, if you start with $10,000 and lose 5 trades risking 2% per trade, your drawdown is not 10%. Instead, your account shrinks to $9,039.21 (a 9.6% drawdown) because each risk percentage is calculated against a smaller remaining balance.