Five losses in a row feels like evidence. The setup must have stopped working, the market must have changed, something must be wrong. Usually nothing is: long losing streaks are an ordinary part of any strategy with a win rate under 100%, and they are more common than intuition allows.
Two different questions
There is a big difference between these:
- "Will my next five trades all lose?" With a 60% win rate: 0.4⁵, about 1%.
- "Will I see five losses in a row somewhere in my next 100 trades?" With the same win rate: about 46%.
The first is the question the feeling answers. The second is the one that matters, because you will take a hundred trades.
How long a streak to expect
Probability of at least one losing streak of a given length within 100 trades:
| Win rate | 5 in a row | 6 in a row | 8 in a row | 10 in a row |
|---|---|---|---|---|
| 60% | 46% | 21% | 4% | 0.6% |
| 50% | 81% | 55% | 17% | 4% |
| 40% | 98% | 87% | 49% | 21% |
The typical longest losing streak over 100 trades is about 5 at a 60% win rate, 6 at 50%, and 8 at 40%. Over 250 trades, add one or two to each.
A trend-following strategy that wins 40% of the time should expect an eight-trade losing streak about as often as not. That is not a malfunction; it is the price of its large winners.
What a streak costs
The streak itself is not the danger. The size you trade it at is. Eight losses in a row:
- at 1% risk per trade: about −7.7%
- at 2%: about −14.9%
- at 5%: about −33.7%
The first is a bad week. The last takes a 51% gain to recover from. Drawdown math and risk per trade goes further into that.
Before the streak arrives
- Know your number. From your win rate, look up the streak you should expect and decide in advance that a streak of that length is not a reason to change anything.
- Size for the streak, not the average. Risk per trade should be small enough that the expected worst streak is survivable without changing behaviour.
- Separate a streak from a broken edge. A streak is a run of normal losses. A broken edge shows up as a falling expectancy over a large sample. Only the second is a reason to stop.
- Set a circuit breaker. A maximum number of consecutive losses per session keeps a normal streak from turning into revenge trading. See revenge trading: how to spot tilt in your own data.
Experience it first
Knowing the math does not make the sixth loss feel normal. Sitting through streaks in replay does help: the journal records the longest losing streak of every session, so you see how often streaks of five and six turn up in your own trading, before they are live.