What it means
With a 40% win rate, 8 losses in a row within 100 trades is about a coin flip. Plan for it.
Example
With a 50% win rate, the chance of the next 4 trades all losing is 6.25%.
In practice
Losing streaks are a mathematical certainty, not bad luck. Traders work out how long a streak their win rate will produce and choose a risk per trade that survives it with room to spare.
Ruin does not have to mean zero. For most people it is the loss at which they would stop trading, so the limit is personal.
What to watch for
Small increases in risk per trade raise the chance of ruin steeply. A streak also feels far worse than the numbers suggest, and breaking the rules in the middle of one is what turns it into ruin.
Related terms
3 terms- DrawdownA fall from your account's peak to a later low; recovering takes a bigger gain than the loss.
- Risk per tradeThe share of your account you can lose if a trade's stop is hit, usually 0.5% to 2%.
- Daily loss limitA hard cap on how much you can lose in a day; hit it and you stop trading until tomorrow.