Strategies · Lesson 14 · Beginner

Losing Streaks and the 6-Percent Rule

You manage drawdowns with hard emergency brakes and reduce your size during bad phases instead of increasing it.

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The losing streak in the setup context

Even a good setup goes wrong in streaks. The strategy reflex must not be to ramp up size to make it back. Schwager is unanimous: on a bad run, reduce size, never increase it. Jones: when I am trading poorly I keep reducing. Seykota: trying to play catch up is lethal.

The mechanics and math of the 6-percent monthly brake (including a calculator) are in the risk management lesson 6-Percent Rule and Drawdown (r-sechs-prozent-regel). For strategy, remember: over 6 percent monthly drawdown or three losses in a row, the month is over.

How much profit a drawdown needs to recover

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Test yourself

You have lost 7 percent this month. What is the rule?

Stop trading for the rest of the month
Increase size to make back the losses
Buy more into the loss to lower the average

The key points at a glance

At more than 6 percent monthly drawdown, stop trading until the end of the month.
Reduce size during bad phases, never increase it.
No revenge trading, no averaging down.
Humility after wins, the biggest losses often follow the biggest wins.

Deep dive

Why losing streaks are mathematically unavoidable

Even with a real edge, bad runs are normal. Flip a coin often enough and you will see eight heads in a row, and with a 50 percent hit rate losers inevitably line up back to back. The problem is not the streak, it is the reflex to crank up your size.

Elder's coin toss shows the real danger: the trader with 3 dollars goes broke before the one with 10 dollars, even though every flip is identical. A small account is only a few losses away from bankruptcy.

Survival first, then steady returns, and only last high profits.
Jones reduces size when things go badly instead of increasing it.
Seykota calls scaling up after losses lethal.

Available risk: how to actually calculate the 6 percent limit

Available risk sums up your already realized monthly losses plus the capital in open trades that is at stake against their stops. Once this total hits 6 percent of your equity at the start of the month, you open no new trades.

Paper profits do NOT count as a buffer, only drawdown counts.
3 percent realized plus 2 percent open equals 5 percent available risk.
If equity rises, the 2 and 6 percent limits move up the following month.

The comeback mistake: the biggest losses come after the biggest wins

Freshly won money gets booked by your brain like casino chips (house money), and you gamble with it more loosely. That is why the biggest losses often follow directly after the biggest wins. At new equity highs the rule is: less risk, not more.

After a drawdown Elder starts with tiny size and cuts risk from 2 to 1 percent. Averaging down turns a limited streak into a catastrophe: with leveraged perpetuals, adding to a loser means moving closer to liquidation.

Drawdown = the decline of your account balance from its most recent high, measured in percent.

Sources: Elder, Schwager, Taleb

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