Drawdown: The Math Behind Surviving Losing Streaks
Every strategy has losing streaks. The question is not whether you will have them — it is whether your position sizing allows you to survive them.
What Is Drawdown?
Drawdown is the peak-to-trough decline in account equity. A 20% drawdown means your account fell from its peak value by 20% before recovering. Maximum drawdown is the largest such decline over the trading history — the worst case you have actually experienced.
The Asymmetry of Loss
Recovering from drawdown is harder than incurring it, due to mathematical asymmetry:
- Lose 10% → need 11.1% gain to recover
- Lose 20% → need 25% gain to recover
- Lose 50% → need 100% gain to recover
- Lose 75% → need 300% gain to recover
This asymmetry is why controlling drawdown is the single most important variable in long-term trading survival. A 50% drawdown does not require "twice as good" trading to recover — it requires extraordinary performance.
Consecutive Losses Are Normal
With a 50% win rate, the probability of 5 consecutive losses is (0.5)⁵ = 3.1%. Over 100 trades, you can statistically expect this to happen approximately 3 times. With a 40% win rate, 8 consecutive losses has a meaningful probability over a year of trading. Is your position sizing built to survive 8 consecutive losses without emotional damage?
The 1% Rule as a Survival Framework
Risking 1% per trade with a 50% win rate means a 10-trade losing streak costs 10% of account. That is recoverable. Risking 5% per trade, the same losing streak costs 50% — and you are now in the dangerous recovery asymmetry zone.