Your account's down from its high, it's been a couple of weeks, and you're starting to do the math on how much worse it could get. That's a rough spot to make decisions from.
The good news is you can work out ahead of time how deep a slump can get from plain bad luck. Then you've got a number to check against, instead of a feeling.
What a drawdown actually is
A drawdown is the drop from your account's highest point down to the lowest point after it. It doesn't matter where you started. It's measured from the top.
Measure it in R, not dollars
R is what you planned to lose on one trade. If your stop is usually $100 away, 1R is $100. A 15R drawdown means you lost the same as 15 full stop-outs, net.
The reason to use R: dollars change every time your size changes. Ten losses at 1 contract and ten losses at 3 contracts look totally different in dollars, but they're the same thing in R. So R lets you compare this month to last year honestly.
How deep is normal?
I shuffled three made-up systems 20,000 times each. All three have about the same edge. The only real difference is how they win: often and small, or rarely and big.
Each number is a normal bad drawdown: the deepest drop you'd see in 19 out of 20 shuffles. The small number under it is the typical one: half the shuffles came out worse, half better.
| Made-up system | 100 trades | 200 trades | 500 trades |
|---|---|---|---|
| 40% wins, wins 2R | 19Rtypical 10R | 23Rtypical 12R | 29Rtypical 16R |
| 50% wins, wins 1.5R | 14Rtypical 7R | 16Rtypical 9R | 19Rtypical 12R |
| 60% wins, wins 1R | 11Rtypical 6R | 13Rtypical 7R | 15Rtypical 9R |
Coin-flip math, 20,000 shuffles each. Wins are a fixed size, losses are always 1R. Not trading results. Darker = deeper.
Lower win rate, deeper holes
Same edge, very different ride. The 40% system's normal bad drawdown over 100 trades is 19R. The 60% one is 11R. If you trade a low win rate style, you need more room.
More trades, deeper holes
Same as with losing streaks. The more you trade, the deeper your worst drawdown gets, even when nothing about your trading changed.
Turn it into dollars
Multiply by your 1R. If you risk $100 a trade and you're closest to the 50% row over 200 trades, a normal bad drawdown is about 16 × $100 = $1,600.
Now compare that to your account, or to your prop firm's max loss if you trade one. If the normal bad case is close to the limit, that's worth knowing before the slump, not during it.
Find your own deepest drawdown in Excel
This assumes one row per trade, with the profit or loss in column B.
- Running total in C2:
=SUM($B$2:B2) - Highest so far in D2:
=MAX(N(D1), C2, 0) - Drop from the high in E2:
=C2-D2 - Copy C2:E2 down to your last trade. Then
=MIN(E:E)is your deepest drawdown in dollars. Divide it by your 1R to get it in R.
Past the normal range doesn't automatically mean the system is broken. It means it's time to look closer. Inside it means bad luck can explain it, and that's usually a reason to hold off on changing your rules.
If you haven't already, check your longest losing streak too. The two numbers together give you a pretty good idea of what "normal bad" looks like for you.
This article is general math, not trading advice.