What drawdown means, and why the simulator shows a range
A drawdown is how far your account falls from its last high point before it recovers. A 30% drawdown means that at some point you were 30% below your best balance. It's also the part you have to sit through, so it's worth knowing in advance how deep it can get.
The expectancy above is an average. Real results come in one order only, and the order matters. The simulator plays the same rules out thousands of times with different random orders of wins and losses, so you see the spread: a typical run, a bad one (only 5 in 100 runs are worse) and a good one.
1% or 5% per trade: the same edge, a different life
Take a 40% win rate with wins twice the losses, 100 trades and 10,000 to start: a real edge. Here is what the simulator gives for 2,000 runs (seed 1):
| Risk per trade | Bad case (5th) | Median | Drop ≥ 30% | Drop ≥ 50% | Below half the start |
|---|---|---|---|---|---|
| 1% | 9,515 | 12,081 | 0.1% | 0% | 0% |
| 5% | 6,453 | 20,851 | 86.4% | 25.5% | 8.6% |
At 5% the median ends higher, which is exactly why big risk is tempting. But the price is a deep drop in almost every run (86.4% of runs fall 30% or more from a peak, 25.5% fall by half), and the bad case ends at 6,453, a loss of 35.5%. At 1% the bad case ends at 9,515 (4.9% down): boring, and easy to recover from. The losing streaks are the same in both (7 in a row typically, 12 in a bad case): only the damage they do changes.
What the simulator can't know
- Trades are treated as independent. In real markets losses cluster: a strategy can stop working for months.
- Every win and every loss is the same size. Real results vary, and gaps can make a loss bigger than 1R.
- No fees, spreads or taxes. They lower every result a little, and the more you trade, the more.
- Your win rate is an estimate. If it comes from a small number of trades, the real one may be lower.
Expectancy, in plain words
Expectancy is what you make on average per trade, measured in "R", the amount you risk. With a 40% win rate and wins twice the size of losses: 4 wins × 2R = 8R, minus 6 losses × 1R = 6R, so you're up 2R every 10 trades, or +0.2R per trade. Lose 60% of the time, still make money.
The break-even win rate is 1 ÷ (1 + reward:risk). At 2:1 you need just over 33%; at 3:1, 25%; at 4:1, 20%.
The table most beginners never see
| Win rate | 1:1 | 1.5:1 | 2:1 | 3:1 | 4:1 |
|---|---|---|---|---|---|
| 30% | -0.4 | -0.25 | -0.1 | +0.2 | +0.5 |
| 35% | -0.3 | -0.12 | +0.05 | +0.4 | +0.75 |
| 40% | -0.2 | 0 | +0.2 | +0.6 | +1 |
| 45% | -0.1 | +0.13 | +0.35 | +0.8 | +1.25 |
| 50% | 0 | +0.25 | +0.5 | +1 | +1.5 |
| 55% | +0.1 | +0.38 | +0.65 | +1.2 | +1.75 |
| 60% | +0.2 | +0.5 | +0.8 | +1.4 | +2 |
Break-even win rates: 1:1 → 50%, 1.5:1 → 40%, 2:1 → 33.33%, 3:1 → 25%, 4:1 → 20%.
What I've learned
- Low win rates are normal for trend-following. In my experience, being right somewhere around 35–48% of the time with wins 2 to 4 times bigger than losses is realistic. It feels like losing most days, and it can still work.
- Cutting winners early destroys the maths. If fear makes you take 1R instead of 2R, a 40% win rate turns from profitable to losing.
- Plan for the streak, not the average. A run of 8–10 losses will happen eventually. If that streak would break you financially or emotionally, your risk per trade is too big.
- Your numbers must come from a record. Write down every trade. A win rate you remember is always higher than the one you have.
Questions
- What is "R"?
- The money you risk on one trade: the distance from entry to stop times the number of shares. Measuring results in R lets you compare trades of any size. The position size calculator sets R for you.
- How is the losing streak estimated?
- With a common approximation for the longest run of losses expected in a number of trades: log(trades) ÷ log(1 ÷ loss rate). It's a typical value, not a maximum. Longer streaks are possible.
- Is a high win rate better?
- Only together with the size of wins and losses. A 70% win rate with losses three times bigger than wins loses money.