Drawdowns and Losing Streaks
What a 10%, 20% and 40% drawdown actually feels like, how many losses in a row are statistically normal, and why beginners do the worst possible thing - increase size - at exactly the wrong time.
- ·What a drawdown is
- ·How recovery math works
- ·Normal losing streaks
- ·The emotional curve of a drawdown
- ·Why beginners size up when losing
- ·Surviving a bad run
Every system, even a good one, goes through stretches where nothing works. Trades that should have hit their targets stop out instead. The account, which was climbing nicely, starts sliding. This slide has a name: a drawdown. How you behave during it decides almost everything. The same losing streak that a calm trader walks out of barely scratched can wipe out a beginner completely, not because the market did anything unusual, but because of what fear made them do with their position size.
Arjun had a swing-trading system he trusted, and Rs 2,00,000 in his account. For two months it worked, the account crept up to Rs 2,20,000. Then came a rough patch: four losing trades in a row pulled him back down to about Rs 1,98,000, a small dip his system had survived many times before. But this time it stung, and Arjun decided to "make it back in one shot" by doubling his usual position size on the next trade. That one lost too. Now down sharply, he doubled again, and again. In two weeks, a routine drawdown his system would have recovered from on its own had become a 45% hole. The system was never broken. His reaction to a normal losing streak was.
Arjun's story is the single most common way beginners turn a survivable dip into ruin. Let us take it apart so it never happens to you.
What a drawdown actually is
A drawdown is simply the fall from your account's highest point, its peak, down to its lowest point before it makes a new high. If your account touched Rs 1,00,000 and then dropped to Rs 80,000, you are in a 20% drawdown. It is measured from the peak, not from where you started, because the peak is the number your brain remembers and quietly mourns.
Every trader, every fund, every legendary investor lives in a drawdown most of the time. Making a new high is the exception. Sitting below your peak is the normal state. Once you accept that, the panic loses much of its grip.
What 10%, 20% and 40% actually feel like
Numbers on a screen do not capture the feeling, so let us use a Rs 1,00,000 account as our example (illustrative, not advice).
A 10% drawdown is Rs 10,000 gone from your peak. It is annoying. You replay the trades. But it is well within what any normal system does, and you need only an 11% gain to get back to even. A 20% drawdown is Rs 20,000 down. Now you are rattled, checking the account too often, sleeping a little worse. You need a 25% gain to recover. A 40% drawdown is Rs 40,000 down, almost half of your peak feels gone, and this is where fear takes the wheel. You need a 67% gain just to climb back, and that is exactly when most people make their worst decisions.
The reason recovery gets harder is the same lopsided maths from Chapter 2: a loss shrinks the base you have to grow from, so the gain needed to recover is always bigger than the loss itself.
| Drawdown from peak | Gain needed just to get back to even |
|---|---|
| -10% | +11% |
| -20% | +25% |
| -30% | +43% |
| -40% | +67% |
| -50% | +100% |
The formula is simply: gain needed = drawdown divided by (1 minus the drawdown). Notice how gentle the top of the table is and how steep the bottom gets. Staying in the shallow part of this table is most of the game.
A losing streak is not a broken system
Here is the part almost no beginner believes until it is too late: long runs of losses are completely normal, even for a genuinely good system.
Think of a coin flip. Heads you win, tails you lose, a 50% win rate. If you flip a coin 100 times, you will almost certainly see a run of 5 or 6 tails in a row somewhere in there. It is not a sign the coin is broken. It is just what randomness looks like up close. The odds of 5 losses in a row at a 50% win rate are about 1 in 32, and of 6 in a row about 1 in 64, so across a few hundred trades, such streaks are not just possible, they are practically guaranteed to show up.
So when four, five, six trades lose in a row, your first thought should not be "my system is broken" or "I have to win it back now". It should be "this is the part of the curve I was warned about". A drawdown is the price of admission, not a malfunction.
Drawdowns and losing streaks are normal, expected features of every strategy, not signs that something is wrong. The danger is almost never the streak itself. It is what you do with your position size while you are inside it.
The trap: sizing up to win it back
When you are down, your brain wants the pain gone fast. The fastest-looking route is to bet bigger, so a single win erases the whole hole. This feels bold and decisive. It is the most reliable way to convert a normal dip into permanent ruin.
Walk the maths with Arjun. He was down about 10%. A losing trade at double size cost him roughly double, so he dropped to around -22%. From there a normal -10% table problem (needing +11% to recover) had become a -22% problem (needing +28%). He doubled again, lost again, and slid past -40%, where the recovery maths turns brutal. He sized up exactly as the climb back got steeper, the worst possible timing.
The headline beginner mistake of this whole course: increasing your position size during a drawdown to "win it back" quickly. This is exactly backwards. A drawdown is when your judgement is most clouded and your capital is most fragile, so it is the worst time to bet bigger. The better move is to reduce size while you are down, never raise it. Get smaller, get calm, and let your normal edge do the recovering.
This is not advice tuned to your account; it is a general rule of survival. Bigger bets when you are already hurting is how good systems with bad operators blow up.
How a drawdown looks for each kind of participant
The same word, "drawdown", wears a very different face depending on how you engage with the market.
| You are a... | A normal drawdown looks like | What turns it into ruin |
|---|---|---|
| Long-term investor | The whole portfolio down 30-40% in a crash, like NIFTY in early 2020 | Panic-selling everything at the bottom and locking the loss in |
| Active trader | A run of 5-8 losing trades, account down 10-20% from peak | Revenge trading and doubling position size to recover fast |
| F&O buyer | A string of options expiring worthless, a steady bleed lower | Buying even more lots, fighting time decay with size |
| Option seller | Rare but violent, one sharp gap erasing weeks of premium | Already over-leveraged, then adding to a losing position |
Notice the cure is identical down every row: protect capital, control size, and do not let a normal drawdown bait you into a bigger bet. A SEBI study published in September 2024 found that about 91% of individual traders in equity derivatives (F&O) made net losses in FY2024, with the average loss-making trader losing roughly Rs 1.2 lakh that year. This is period-specific data, not a permanent law, and reckless behaviour inside drawdowns is one of the central reasons so many traders end up on the losing side.
How to behave in a drawdown
When the account is sliding, you only need three calm moves, and not one of them is "bet bigger".
- Reduce your size, do not raise it. Cut your per-trade risk while you are down, perhaps to half. Smaller bets keep you in the game long enough for your edge to reappear.
- Check the process, not the profit. Are you still following your own rules, entries, stops, sizing? If yes, the drawdown is likely just variance. If no, the problem is discipline, not the market.
- Take a break if the pain is loud. Stepping away for a day, or trading tiny sandbox-sized positions (analyzer mode in OpenAlgo) for a while, breaks the revenge-trading loop better than any willpower.
A drawdown is a test of behaviour, not of intelligence. Pass it by getting smaller and slower, never bigger and faster.
When this fails
The whole chapter rests on one idea: most drawdowns are normal variance, so you should ride them out at a smaller size. But sometimes a drawdown is not variance at all, it is your edge genuinely breaking, and riding it out just bleeds you. Telling the two apart honestly matters.
- A broken edge looks different from a streak. Normal variance is a cluster of losses while you still follow your rules and your average loss stays the size you planned. A broken edge shows up as losses that are bigger than your plan allowed, or a drawdown far deeper and longer than anything in your testing, on trades you took correctly.
- Markets change. A strategy tuned for a calm, trending market can quietly stop working when volatility regime shifts. If a careful, rule-following approach keeps losing well past its historical worst drawdown, that is a signal to pause and review the edge, not to size up and "trust the process".
- Size down first, diagnose second. The good news is the correct first response is the same either way: get smaller. Cutting size protects you whether the drawdown is harmless variance or a dying edge. You never need to bet big to find out which one it is.
- You cannot tell from inside one bad trade. A single loss, or even three, tells you almost nothing. Only a meaningful sample, dozens of trades against your tested expectations, can reveal a truly broken edge. Patience and records, not panic, are how you read the difference.
The point is calm, not blind faith. Stay small, keep honest records, and let the numbers, not the fear, tell you whether to keep going or to stop and rebuild.
Quick self-check
1. What is a drawdown, in plain words?
It is the fall from your account's highest point (its peak) down to its lowest point before it makes a new high, measured as a percentage. If you peaked at Rs 1,00,000 and dropped to Rs 80,000, you are in a 20% drawdown.
2. If your account is in a 40% drawdown, roughly what gain do you need to get back to even?
About a 67% gain. The formula is drawdown divided by (1 minus the drawdown), so deeper falls need disproportionately larger recoveries. This is why staying in the shallow part of the table matters so much.
3. If a system wins 50% of the time, is a run of 5 or 6 losses in a row a sign it is broken?
No. At a 50% win rate, 5 losses in a row happen roughly 1 time in 32 and 6 in a row about 1 in 64, so over a few hundred trades such streaks are practically guaranteed. It is normal variance, not a malfunction.
4. What is the worst thing a beginner typically does during a drawdown?
They increase their position size to "win it back" quickly. That is exactly when capital is most fragile and judgement most clouded, so bigger bets turn a normal dip into ruin. The right move is to reduce size, not raise it.
5. How can you tell a normal losing streak from a genuinely broken edge?
A normal streak keeps your losses the planned size while you follow your rules; a broken edge shows up as losses bigger than planned, or a drawdown far deeper and longer than anything in your testing. Either way, the first response is the same: cut size, then diagnose calmly over many trades, never over one.