Losing streaks, position size and practical ruin

Two separate calculations

When each trade risks a fixed fraction f of remaining equity and every loss is exactly that fraction, equity after n losses equals starting equity × (1 − f)ⁿ. This declining position size slows depletion. It does not protect against gaps, borrowing costs or losses larger than the model assumes.

If losses are independent and each trade loses with probability q, the probability that one specified block of n trades consists entirely of losses is qⁿ. That is different from the chance of encountering a streak anywhere in a long record, where many overlapping opportunities exist.

Worked example: eight losses

Take an imaginary $10,000 account and eight consecutive losses. Risking 2% of remaining equity each time leaves $10,000 × 0.98⁸ ≈ $8,507.63, a 14.92% drawdown. Risking 10% leaves approximately $4,304.67, a 56.95% drawdown. The same sequence therefore has very different consequences.

Under an assumed independent 50% loss probability, the next specified eight trades are all losses with probability 0.5⁸ = 0.390625%. This is not the probability of an eight-loss streak somewhere in 500 trades. Nor does it describe a real strategy unless the independence and probability assumptions are defensible.

Define failure before estimating its probability

Practical ruin can occur long before equity reaches zero: minimum contract sizes, collateral demands or a personal capital floor may stop trading. Actual losses may cluster by market regime, making independence unrealistic. A profitable historical average also does not establish that the strategy's future edge remains positive.

Study clusters with a fixed review rule

Use available closed daily, weekly or monthly bars to identify periods when similar setups failed repeatedly, then record those clusters in a separate hypothetical review. Specify the capital floor and sizing rule before comparing scenarios. Student Wyckoff Pro provides closed-bar context; it does not turn a short historical sample into a verified ruin probability.

Primary sources

Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.

• Statistically Independent Events
• The 2% Rule

Sources checked: 2026-10-23