Risk of ruin: how position size decides whether a losing streak ends your account

Every strategy has losing streaks. Whether a streak is an annoying week or the end of your account depends almost entirely on how much you risk per trade. The maths is simple and it is worth seeing once.

Losing streaks are normal

Even a strategy that wins half its trades will have long losing runs. Over 100 trades at a 50% win rate, the longest losing streak you should expect is about 6 trades. Over more trades, it gets longer.

What a 10-trade losing streak does

Take 10 losses in a row and see what each risk level leaves you with:

• Risking 1% per trade: your account falls by about 9.6%. To get back you need a gain of about 10.6%.
• Risking 5% per trade: your account falls by about 40.1%. To get back you need a gain of about 67%.
• Risking 10% per trade: your account falls by about 65.1%. To get back you need a gain of about 187%.

Why recovery gets harder

Losses and gains are not symmetric. If you lose 50%, you need a 100% gain just to break even. The deeper the hole, the less likely you are to climb out, and the more tempted you are to take risks to win it back.

How likely is a 10-loss streak?

The chance that a given run of 10 trades is all losses is (loss rate) to the power of 10. With a 55% win rate that is 0.45 to the power of 10, about 0.03%. With a 40% win rate it is 0.6 to the power of 10, about 0.6%. Small for one run, but over hundreds of trades, serious streaks do occur.

What to do about it

• Risk a small fixed percent per trade, often between 0.5% and 2%.
• Work out the lot size from your stop with the position size calculator.
• Set a daily and weekly loss limit and stop trading when you reach it.
• Never increase size after a loss to win it back.

Position sizing will not make a strategy profitable. It decides whether you are still trading when it turns out to be.

Trading carries a high risk of loss. This article is for education only and is not financial advice. Results shown are from setups tracked in our own journal, they are not audited, and past results do not guarantee future results.