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. Maximum drawdown is the largest such decline over the full trading history — your real worst-case experience. Understanding and planning for drawdown is more important than planning for profit.
The Asymmetry of Loss
Recovering from drawdown requires proportionally larger gains, due to mathematical asymmetry:
- Lose 10% → need 11.1% to recover
- Lose 25% → need 33.3% to recover
- Lose 50% → need 100% to recover
- Lose 75% → need 300% to recover
This asymmetry is why controlling drawdown is the single most critical variable in long-term survival. A 50% drawdown requires extraordinary performance to recover from — the kind most strategies cannot consistently deliver.
Consecutive Losses Are Normal
With a 50% win rate, 5 consecutive losses has a 3.1% probability — occurring roughly 3 times per 100 trades. A trader placing 200 trades per year will statistically experience multiple 7-trade losing streaks. Is your position sizing built to survive those streaks without emotional damage or account danger?
The 1% Rule
Risking 1% per trade: a 10-trade losing streak costs 10% of account — recoverable. Risking 5% per trade, the same streak costs ~40% — deeply in the dangerous asymmetry zone and almost certainly accompanied by emotional breakdown.
Drawdown is the price of participation in any positive-expectancy strategy. The question is whether your position sizing makes it survivable.