A trading drawdown is the fall in your account from its last high to its current low, and every trader who sticks around long enough will sit through one. Handling a losing streak well comes down to three things: knowing what is normal, shrinking your risk before the damage grows, and finding out whether the losses come from you, your method or the market.
Quick answer: what should you do in a trading drawdown?
Follow rules you wrote before the streak started: 1) cut your risk per trade at a set drawdown level, 2) pause live trading at a deeper level, 3) review your journal to see whether losses came from execution, the method or market conditions, and 4) return to full size gradually, only once you are trading your plan again.
What a drawdown is, and how it is measured
Drawdown is measured from peak to trough. If your account reaches £5,000 and then falls to £4,600, you are in an 8% drawdown, even if £4,600 is still above your starting balance. Maximum drawdown is the deepest of those falls over a period, and it is the figure that tells you how painful a method has been to trade.
The reason drawdowns matter so much is recovery maths. A loss has to be recovered from a smaller balance, so the gain you need is always larger than the loss you took.
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
Small drawdowns are an ordinary cost of trading. The rules below aim to stop a small one turning into a large one.
How often losing streaks happen
Most traders underestimate how often long runs of losses turn up. A losing streak is not a sign that anything is broken; it is what random sequences look like. Believing a win is now due is the gambler’s fallacy in trading.
| Streak length | 50% win rate | 40% win rate |
|---|---|---|
| 5 or more losses | 81% | 98% |
| 6 or more losses | 55% | 87% |
| 8 or more losses | 17% | 49% |
| 10 or more losses | 4% | 21% |
These figures are our own calculations and assume every trade is independent with a fixed win rate, which real trading never quite is. Still, the lesson holds: a trader winning four trades in ten should expect a run of six losses in most 100-trade samples. If you rely on a high win rate to feel safe, our guide on why win rate matters less than risk to reward is worth reading first.
Is it you, the method or the market?
A drawdown has one of three causes, and each needs a different fix. Your trading journal and weekly review routine is how you tell them apart, so go through the losing trades one by one.
Execution: you did not follow the plan
Look for trades taken outside your rules, stops moved, positions sized up after a loss, or entries made late out of frustration. If most losses fall here, the method has not failed; your process has. Chasing losses is covered in our guide on how to stop revenge trading after a loss.
Market conditions: the method is out of season
A trend method struggles in a choppy range, and a range method gets run over by a strong trend. If your losses are valid trades taken in conditions your method was never built for, the answer is to filter those conditions out, not to rewrite the method.
The method: the edge may have gone
This is the least common cause and the hardest to prove. Only conclude it after a large sample of cleanly executed trades.
Drawdown rules to set before you need them
Decisions made in the middle of a losing streak are rarely good ones. That is why our rules-based risk model for trading sets drawdown steps in advance, alongside your usual risk per trade on each position.
- Set a size-cut level. In our model, at 6% below the account high, risk per trade is halved.
- Set a pause level. At 10% below the high, live trading stops for a full journal review.
- Set a daily or weekly loss limit. This stops one bad session from doing a week’s damage.
- Write a return rule. Decide in advance what has to happen before full size comes back.
Cutting size has an honest trade-off. It keeps a drawdown shallower, but the recovery trades are smaller too, so getting back to the high usually takes longer. We accept that, because a slow recovery is far better than a deep hole.
Leverage makes a drawdown move faster
On a leveraged account, a drawdown is not only a number on a screen. Under the FCA’s permanent rules on CFDs for retail clients, providers must close out positions when your funds fall to 50% of the margin needed, and losses are limited to the funds in your CFD account. That protects you from owing money, but it can also close your trades at the worst moment.
CFDs and spread bets magnify losses as well as gains, so a drawdown that would take weeks on a small position can arrive in hours on a large one. Our guide on how to calculate position size for CFDs and spread bets shows how to keep each trade’s loss to a set amount.
Worked example: a losing streak on a £5,000 account
Example, using hypothetical figures. A £5,000 account is at its high, risking 1% of the current balance per trade, with the drawdown steps above.
- Losses one to seven: the balance falls to £4,660.33, which is 6.8% below the high. The 6% step has been crossed.
- Loss eight: risk is now 0.5%, or £23.30, so the balance ends at £4,637.03, 7.3% below the high. Without the step it would be £4,613.72.
- The return rule: full size comes back once the account is within 3% of its high, at £4,850 or more. At 0.5% risk, a winner that makes twice the risk adds 1%, so it takes five such winners to get there, not four.
The saving on one trade looks small, but the step does its real work if the streak keeps going.
Common mistakes in a trading drawdown
- Increasing size to win it back. This is how a normal drawdown becomes a blown account.
- Trading more often. Extra trades to “get it back” are a form of overtrading that a few simple limits can stop.
- Switching methods after five losses. Five losses is not a meaningful sample.
- Measuring from the starting balance. Drawdown is measured from the high, not from your first deposit.
- Coming back at full size straight after a pause. Let the return rule decide.
Frequently asked questions
What is a normal drawdown for a trader?
There is no single figure, because it depends on your risk per trade and your method. As a guide, at 1% risk per trade a run of ten straight losses produces a drawdown of about 9.6%, so drawdowns of that size should be expected and planned for.
Should I stop trading after a losing streak?
Stop if you have reached your written pause level or if you notice you are no longer following your rules. Otherwise, cutting size at your first step is usually better than stopping on a feeling.
How long does drawdown recovery take?
It depends on how deep the drawdown is, your risk per trade and how often your setups appear. With reduced size it takes longer, which is the price of keeping the hole shallow.
How do I know if my strategy has stopped working?
Check execution and market conditions first, because they explain most drawdowns. Only judge the method on a large sample of trades taken exactly to plan.
Next steps
A drawdown is where the long-run maths meets your nerves. Our guide to risk of ruin and the odds of blowing an account shows why small risk per trade matters so much, and the five psychological hurdles traders face covers the emotional side.
Building a rules-based risk model and the 5 key psychological hurdles are both covered in our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
