Drawdown and losing streaks
What you learn in 3 minutesDrawdown is how far an account has fallen from its highest value, measured in money. If an account peaks at KSh 200,000 and later sits at KSh 180,000, the drawdown is KSh 20,000, or 10 per cent. A losing streak is simply several losing trades in a row. It happens to everyone who trades often enough, and it does not mean the method is broken.
Six losses in a row at 2 per cent risk
| Step | Amount | Note |
|---|---|---|
| Starting account | KSh 100,000 | the balance before the first trade |
| Risk per trade | 2 per cent | the most the reader accepts losing on one trade |
| Loss 1 | KSh 2,000 | 2 per cent of KSh 100,000 |
| Loss 2 | KSh 1,960 | 2 per cent of the reduced balance, KSh 98,000 |
| Loss 3 | KSh 1,920.80 | 2 per cent of KSh 96,040 |
| Loss 4 | KSh 1,882.38 | 2 per cent of KSh 94,119.20 |
| Loss 5 | KSh 1,844.73 | 2 per cent of KSh 92,236.82 |
| Loss 6 | KSh 1,807.84 | 2 per cent of KSh 90,392.08 |
| Balance after six losses | KSh 88,584.25 | KSh 100,000 minus the six losses added together |
| Drawdown from the peak | 11.42 per cent | the fall from KSh 100,000 to KSh 88,584.25 |
This ignores spreads, commissions and any swap charged for holding a position overnight. Those costs vary between brokers, so the real fall will be slightly larger. The figures here are rounded to the nearest cent.
The mistake people make here
The common mistake is to double the risk after two or three losses, hoping one big win will repair the account. That turns a normal streak into a deep drawdown, because the next loss is twice as heavy. A second mistake is to abandon a tested method after four losses, then re-enter on a trade that was never part of the plan. Instead, keep the risk per trade fixed, write the streak down, and check whether the losses came from the method or from breaking your own rules. If the rules were followed, the streak is just the cost of doing business.Check yourself
An account falls from KSh 150,000 to KSh 135,000. What is the drawdown in shillings and as a percentage?
The fall is KSh 15,000. As a share of the peak: 15,000 divided by 150,000 equals 0.10, so 10 per cent.
With a KSh 50,000 account and 2 per cent risk per trade, what is the loss on the first trade, and what is the balance afterwards?
2 per cent of KSh 50,000 is KSh 1,000. The balance after that loss is KSh 49,000.
EUR/USD is near 1.0850 and one pip on one standard lot is 10 units of the quote currency. Roughly what is one pip worth in shillings on one standard lot, if the shilling rate is 129 to the dollar?
10 dollars multiplied by 129 gives about KSh 1,290 per pip on one standard lot. The exact figure moves with the exchange rate, and the rate your broker uses will differ.